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Annuities reach historic low point

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Annuity rates, the determinants of a pension’s guaranteed income, are on the verge of reaching a historic low point.

This means a retiree purchasing an annuity today will receive about 29 per cent less income than someone who retired five years ago.

The drop is partially attributable to British government bonds offering increasingly lower yields; speculation that the Bank Base Rate may fall yet further in the near future has placed increased strain upon them.

Annuity rates have been falling for some time, but there was a slight upwards tremor after George Osborne announced reforms to pension regulations in April last year; that Autumn, rates started to slide downwards again.

According to figures released today by Hargreaves Lansdown, the top annuity rate available to retirees at present is 5.456%, which would allow a 65-year-old to trade £100,000 in pension funds for an annual income of £5,456 for the rest of their life. Five years ago, this figure was £7,065.

However, rates could continue to drop. “Just because rates have fallen continuously for 10 years, doesn’t mean they can’t fall further,” said Tom McPhail, head of pensions research at Hargreaves Lansdown. “If you are set on buying an annuity, waiting for rates to rise again might not be a smart move. In fact, buying an annuity in April could well be a bad move in itself – we forecast that pension firms will be overstretched by new retirees this year, due to the reforms.”

McPhail is not the first industry figure to express disquiet at the ramifications of the new pension rules. As Your Money previously reported, both Royal London and Scottish Friendly, two of the UK’s largest pension firms, believe there could be trouble ahead. Click here to read more.

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