Annuity rates start to "make up lost ground"

Annuity rates are rising, but their recovery has a long way to go yet, according to the latest Annuity Index from MGM Advantage.

Research from the retirement specialist found annuity rates increased by 2.4% in the second quarter of 2013, and are up 5.6% since December 2012.

LV= says it is seeing the same improvements too, with customers getting annuities worth up to 8% more in recent months. It adds that the enhanced annuity market is particularly competitive.

However, MGM Advantage warns rates are still well below their historical value and over three years have fallen by 15%.

MGM Advantage says this means the average pension pot needs to be worth a massive 24% more than three years ago, in order to create the same level of income that retirees were getting at that time.

A pension pot of £50,000 in June 2010 would have generated an income of around £3,450 per year. To achieve that level of income today would require savings of £62,000.

Aston Goodey, marketing director at MGM Advantage, warns that annuity rates still have a long way to go: "We are not even close to the rates seen even just three years ago, meaning people approaching retirement will still face some difficult decisions."

Although the increases sound positive, Goodey points out that actually they have only made up ground lost in the latter part of 2012. "All of the signs indicate that rates will continue to remain low for some time to come," he adds.

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But an LV= spokesman says it is important that people realise "retirement planned is about more than getting the best annuity rate available" and other solutions, such as drawdown, may be more suitable to some retirees.

Mark Stopard, head of product development at Partnership, says although rates have notched upwards slightly people should not try to second guess the market: "It's a dangerous game, trying to guess where rates will be in three, six or 12 months." He says people looking to annuitise at the moment might consider taking their pension pot in stages, "that way if rates do go the right way you can still get the benefit of that".

This article was written for our sister website Money Observer