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Annuity income tumbles £2k since Budget pensions overhaul

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The average annuity today delivers just over £2,000 less income over retirement compared to one bought in March, when the Chancellor swept away the need for savers to buy the product in his Budget, according to retirement specialist MGM Advantage.

Average annuity rates have fallen in the third quarter of 2014 by 2.38%, MGM’s research suggests. The average standard annuity rate fell by 3.01%, while enhanced rates fared slightly better, reducing by 1.88%.

That means the average annuity today of £3,074 per year – based on a £50,000 pension pot – would pay £2,058 less income over an average retirement compared to the equivalent annuity purchased in March.

Annuity rates are linked to what it costs the government to borrow over a 15-year term, the yield on gilts, because insurers largely buy these gilts to provide the income paid to annuity buyers.

MGM Advantage sales and distribution director Aston Goodey said the fall in annuity rates is due to the yields available on gilts and other fixed interest investments, as well as uncertainty in the market following the announcement in the Budget that retirees can from next April take their pension as a cash lump sum.

“Unfortunately, this all means people who buy an annuity today will receive less income over retirement than those people who purchased earlier in the year,” she said.

People looking for a secure income need to shop around, and ensure the company providing the annuity is considering their individual circumstances when calculating the annuity rate, she added.

“All aspects of a customer’s details are relevant when trying to achieve the best rate, from age and occupation, to where they live, as well as their overall health and lifestyle.”

Future annuity rates

Commenting on the future for annuity rates, Goodey said: “The outlook for annuity rates remains unpredictable. Any improvements in interest rates and the yields available on gilts should help move rates up. However, the market is talking about the middle of next year before we are likely to see any increase in interest rates.

“We also have Solvency 2 looming over us, and the obvious impact that will have on the capital adequacy of annuity providers. As we move through into the new-year, we may see rates improve in the more competitive parts of the market, as providers seek market share.”

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