- Pension reforms have driven down demand for annuities, lowering rates
- Those taking out annuity now are £40 per year worse off than in January
- Annual payouts have dropped to less than half that of 1995 levels
Annuity rates collapsed to all-time lows just weeks after new pension freedoms came into force, research has found.
The average annual income from a standard annuity for a 65-year-old with a £10,000 pension pot has plunged by 5.9 per cent since the start of the year, according to statistics from data firm Moneyfacts.
This would give them an income of just £476 a year compared to in 1995, when they would have typically received around £1,111.
Pension reforms which have allowed savers to withdraw lump sums in cash have driven down demand for annuities, in turn driving down rates, which has left some worse off
Annuity rates have been falling since then. The latest plunge is partly due to a slowdown in demand for annuities in the wake of the pension rule shake-up.
Under the changes, which came into force this month, savers are able to take their pensions in cash. The changes mean that pension savers are no longer required to buy an annuity, which gives a guaranteed retirement income for life. But if fewer people take annuities, rates slip further as insurers have less need to offer competitive deals.
Moneyfacts’ findings will be a particular disappointment to people who have put their retirement plans on hold in order to wait for the pension freedoms, which came into force on April 6, but who may still end up deciding that an annuity would be the best option for them.
In January this year, a 65-year-old with a £50,000 pension pot would have received an average annual payout of £2,727 if they had bought a standard annuity at that time.
A 65-year-old with a pension pot of £10,000 would have received a payout of £1,111 in 1995, but can now expect a yearly return of just £476
But the same person buying an annuity now would typically get a yearly payout of £177 less, at £2,550.
A 65-year-old with a £10,000 pot could have received £506 a year if they bought their standard annuity in January. Now, they would get a payment of just £476 a year on average.
The new all-time low for standard annuity incomes surpasses a previous rock bottom level which was recorded in 2012, just before firms were banned from taking gender into account when pricing products such as motor insurance, life insurance and retirement products such as annuities.
Richard Eagling, head of pensions at Moneyfacts.co.uk, said: ‘In many cases, retirees looking for a secure income now face the unenviable position of annuitising at the lowest point in the product’s history.
‘This is particularly unfortunate for individuals who deferred making a choice until the introduction of pension freedoms but have since decided that an annuity is the most suitable product for them.’
The news came as it emerged that older savers are drawing down unprecedented amounts of equity from their homes.
The boom in equity release – where owners receive a cash lump sum in return for a high-interest loan – is being driven by over-55s who cannot get by on their savings.
More than £325million was borrowed between January and March – the highest amount ever for a first quarter, according to the Equity Release Council.
Their study also found that one in ten homeowners over the age of 55 was missing a meal every week for lack of cash.
Ros Altmann, the Government’s older workers champion, said: ‘There is a group of older people who are left with no choice but to borrow against the value of their homes.
'It’s important they consider the consequences of what they are doing.’