Annuity returns at record low

Pension incomes for new retirees have nearly halved during the past 15 years as annuity rates have hit record lows, research showed today.

The returns paid on annuities, which are used by people with defined contribution or personal pensions to convert their savings into a retirement income, have dived by 45.4% since November 1994.

The steep drop means a 65-year-old man buying an annuity which does not rise in line with inflation will now receive only £625 a year, or just over £50 a month, for every £10,000 he has saved, down from an annual income of £1,145 in 1994.

The research, which was carried out by Investment Life & Pensions Moneyfacts, showed that the income people can expect to receive from an annuity has dropped by 11% during the past year alone, and by 3.3% since September.

Rates are even worse for women, who generally receive lower incomes from annuities than men because the have longer life expectancy.

A 65-year-old woman buying a level term annuity can now expect an average annual income of £585 for every £10,000 she has saved, down from £1,016 in 1994.

Annuity rates have tumbled since the Bank of England began its programme of quantitative easing, as this led to lower gilt yields, upon which annuity rates are largely based.

But the rates have been falling steadily for the past decade as life expectancy has increased.

Richard Eagling, editor of Investment, Life & Pensions Moneyfacts, said: "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."

He said the difference between the highest and lowest annuity rates could be as much as 13%, while people with certain health conditions could also boost their income further by buying a so-called enhanced annuity.