Annuity rates plummet by £2,000
The average annuity is paying £2,058 less income over retirement than it did before Chancellor George Osborne's March Budget.
The average annuity rate for the three months to March 2014 was 6.34%, according to analysis from MGM Advantage, giving customers an annual income of £3,172 (based on converting a pension worth £50,000).
However, during the quarter ending September 2014, the rate fell to 6.14%, cutting the annual income by over 2% to £3,074.
Over the average lifespan an annuity pays out for, the lower rate would see today's annuitants receive almost £100 less a year than those who locked in their money during the three months to March.
Enhanced annuity customers - those who have shorter life expectancy than standard annuity customers - fared worse over the six-month period, with their income reducing by 3.5%.
Nevertheless, enhanced annuity customers secured 20% more annual income when arranging their annuities in the three months to September than standard annuity customers. They stood to receive income of £3,349 a year, compared to the £2,799 income stream fixed by standard annuity customers.
"Annuity rates have tumbled," said Aston Goodey, sales and distribution director at MGM Advantage. He put the reduction down to "the yields available on gilts and other fixed interest investments, as well as the uncertainty remaining in the market following the Budget".
He added: "Unfortunately, this all means people who buy an annuity today will receive less income over retirement than those people who purchased earlier in the year. The difference in rate can make a significant difference in the amount of income over an average retirement."
Goodey urged anyone considering an annuity to shop around and "ensure the company providing the annuity is considering their individual circumstances when calculating the annuity rate".
This means customers should make sure the company has all relevant information, which includes age and occupation, where they live, as well as a picture of their overall health and lifestyle.
Goodey also warned that annuity rates are not set to rise in the near future: "The outlook for annuity rates remains unpredictable. Any improvements in interest rates and the yields available on gilts should help move rates up. However, the market is talking about the middle of next year before we are likely to see any increase in interest rates."
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The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.