Save, make, understand money


Bad news for soon-to-be retirees as annuity rates tumble

Joanna Faith
Written By:
Joanna Faith

Pensioners purchasing an annuity today will earn thousands of pounds less over the course of their retirement than those who retired at the start of the year due to falling annuity rates.

Annuity rates have tanked by 14 per cent so far this year, with a £100,000 pension pot now buying a 65-year-old £4,654, £759 less than at the start of the year, according to research by Hargreaves Lansdown.

Rate changes have been even more pronounced for younger retirees.

A 60-year-old with a £100,000 pension who bought an annuity at the start of the year would have received an income of £4,776 but the same person retiring today would get just £4,051, a 15 per cent decrease. Over the course of a 20-year retirement, that’s a difference of £14,500.

Nathan Long, senior analyst at Hargreaves Lansdown, said: “This year has been nothing short of a horror show for soon-to-be retirees.

“Annuity rates have been cut with great regularity with the best on offer now 14 per cent lower for a 65-year-old than at the start of the year.

“Fears of a no-deal Brexit and a slowdown in the global economy have increased the cost of buying the secure investments that insurers use to underpin annuity payouts. It’s currently making keeping your pension invested look more attractive than it probably should do.”

Should you buy an annuity now?

Long suggests anyone coming up to retirement should carefully consider their options.

“It’s unlikely to be best to buy an annuity when you’re still working, but when you finally retire permanently a combination of secure income to cover the essentials and drawdown for the nice-to-haves is a solid approach,” he said.

“For those who just cannot bring themselves to buy an annuity at these low levels, taking only the income produced by your pension investments is a sustainable way of drawing from your pension.

“There are plenty of funds available that can pay high income levels, but ensuring you have a spread of funds to provide income in retirement is sensible.”

He added: “Using tranches of your pension to buy annuities as you get older helps you to spread the risk of buying when annuity rates are low. You can benefit as annuities generally pay more as you get older and any health conditions that develop can be factored in which can also boost the payouts.”