The analysis shows that average annual pension annuity income has declined throughout much of 2019, and has intensified since August 2019 on the back of a sharp fall in gilt yields. This latest drop in annuity rates means that average annual annuity pension income is now 1.2% lower than its previous all-time low recorded back in September 2016, following the impact of the EU referendum result.
As table 1 shows, the average annual income payable on a single life standard level without guarantee annuity for a 65-year old has fallen by between 12.3% and 12.5% (depending on the purchase price) since the start of the year. For an equivalent enhanced annuity, as shown in table 2, the reduction is between 10.2% and 11.4%.
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.”