The future of annuities – for years the principal route for people to secure an income in retirement – has been thrown into question after rates sank to their lowest ever point in September.
According to research from Moneyfacts.co.uk, income payable has fallen by over 10% since the beginning of the year this year alone – much of the fall coming in August, when gilts yields dropped sharply.
An average single life standard annual annuity income for someone at 65 now stands at just £4100 for every £100,000 invested, while an average enhanced annuity income will yield £4750.
In sharp contrast, in 1995, a 65-year-old man buying a standard “level” annuity with a £100,000 pension pot would have typically received an annual payout of £11,100.
So is investing in an annuity still worthwhile?
According to Richard Eagling, head of pensions at Moneyfacts.co.uk, said: “Although the demand for annuities has reduced substantially since the introduction of pension freedoms in 2015, it is still the only product capable of turning defined contribution pension savings into a guaranteed income for life.
“In the last few years, there has also been an increasing awareness of using annuities as part of a wider range of retirement solutions, typically to provide a baseline income from which to cover monthly living costs. As such, the security that annuities offer makes them an integral part of the retirement income landscape.
“However, the pricing trends at the time of annuitisation are critical to retirement income outcomes. Annuity rate risk, whereby individuals face the danger of locking into a low income at the time they retire, has always been a key retirement risk, but it has increasingly come to the fore again in recent months.
“Given the prevailing political and economic uncertainty, there are obvious merits in a retirement product that can guarantee a regular income for life – the question is whether current rates are still a price worth paying for the unique qualities that an annuity brings.”
Nathan Long, senior analyst at Hargreaves Lansdown, adds: “This year has been nothing short of a horror show for soon-to-be retirees.
“Anyone coming up to retirement needs to choose their options carefully. 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.
“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.
“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.”
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