Annuities: retirement income falls by 30%

Old person with no money

Annuity rates have plummeted by almost 30% since the Bank of England began a program of quantitative easing (QE) four years ago that was designed to kickstart the ailing British economy.

An unintended effect of the QE scheme – that saw the Bank of England issue £375 billion worth of new cash to purchase government bonds and boos the economy – is that pensioners' retirement income has been decimated, a report has indicated.

AXA Life Europe says annuity rates fell by a third since March 2009, to hit the record lows in the second quarter of 2013.

Simon Smallcombe of Axa's UK arm said: "QE has been blamed as one of the main factors in pushing down annuity rates and when you look at the timing of the Bank of England's programme and look at the annuity rates over that time, there is a clear trend of decreasing rates.

Annuity rates are mainly driven by the interest paid by the Treasury on government bonds, also known as gilts. Quantitative easing boosted the price of bonds, which, in turn, drove down the interest paid on them, known as the yield.

Axa said this means pension saver who converted a £100,000 pension pot into an annuity would have obtained an annual income of £5,040 in the second quarter of 2009. But this fell to £3,580 in the second quarter of 2013 – a drop of 29%. Over 25 years, the difference between the annual incomes reaches £36,500.

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At the peak of annuity rates in the second quarter if 2007, the same pensioner would have realised £5,1010 from his pension pot.

Seek advice

Axa's Smallcombe added: "The most useful step people between five and 10 years from retirement can take is to seek advice as early as possible. This allows the adviser to research all options available, such as unit-linked guarantees for people who want to protect their pension pot from falling annuity rates and negative market movements but stay invested to capture any growth at the same time.

"The ability to secure a guaranteed future retirement income and stay invested in the markets with the potential for growth can be a real alternative and does not rule out any option at the chosen retirement date in the future. Unlike annuities, unit-linked guarantees offer flexibility as policy holders can access and move their money if they choose to do so."