Pension Annuity Interest Rates at Record Lows

By: MoneyFacts

The prospects of securing a comfortable retirement have taken a further blow with news that pension annuity rates have hit an all time low. Research from Investment Life & Pensions Moneyfacts has revealed that, after holding firm during the summer, annuity rates have fallen steadily over the last two months.

The average rate for a male aged 65 purchasing a level without guarantee annuity (based on a £10K purchase price) has decreased by 3.3 per cent since September, whilst the equivalent female annuity has seen a 3.6 per cent reduction.

The latest reductions mean that the average male annuity rate is down by 10.8 per cent compared with a year ago, whilst female rates haven fallen by 11 per cent (see Table 1). Over the last 15 years the drop is even more remarkable, with male annuity rates now 45 per cent lower and female rates 42 per cent lower (see Graph 1)

Table 1: 15 years of falling pension annuity rates

Richard Eagling, Editor of Investment, Life & Pensions Moneyfacts, commented: "Given that the stock market recovery has recently boosted the size of many pension pots, it is disappointing that falling annuity rates have had an adverse impact on the retirement income that can be achieved.

"Part of the problem is the low gilt yields that we are seeing, which are still well below last year’s levels.

“Since the purchase of an annuity is a one-off transaction, it is vital that consumers shop around for the best deal for their money. Although under the open market option, an individual is not required to purchase an annuity from the provider with whom they made their pension savings, in reality, relatively few take advantage of the opportunity to switch.

"With few signs that the recent spate of annuity price reductions is at an end, the priority must be to maximise the amount of retirement income received.

"For most consumers, this will only be achieved by shopping around to obtain the best price for their annuity and exploring the open market option. The difference between the highest and lowest standard annuity rates can be as much as 13 per cent. The potential uplift for those in ill health who could qualify for an enhanced annuity is even higher."

Graph 1: Average pension annuity rates 1994-2009 versus 10 year nominal gilt yield (source: Moneyfacts and Bank of England)

Figures show gross annual annuity payable monthly in advance. Figures based on an annuitant aged 65 buying a standard ‘level without guarantee’ annuity for a purchase price of £10K

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