Annuities, which provide an income for life in retirement, are at their lowest rates for many years and will continue to fall, experts warn.
The latest quarterly MGM Advantage annuity index reveals a small decline in standard annuity rates (0.18%) between March and June, and a more significant 3.5% fall for enhanced annuities available to those with medical conditions.
The Annuity Bureau's figures show that over three months to August, the average level annuity bought by a 65-year-old male with £50,000 has fallen by 3%.
More cuts to come
But Billy Burrows, director of the Better Retirement Group, believes they're likely to fall more dramatically looking ahead, because they're linked to UK government bond (gilt) yields, which have dropped to their lowest level for many years as nervous investors snap gilts up in the face of the eurozone and US debt problems.
"It can only be a matter of time before insurance companies start cutting their annuity rates," he says.
That development in the annuities market comes on top of the long-term trend for people to live longer: 20-year-olds are three times more likely than their grandparents and roughly twice as likely as their parents to live to 100, according to the Office of National Statistics. That means annuities have to last them longer.
MGM Advantage says that between June 2009 and December 2010 increased longevity contributed towards conventional annuity rates on average falling by 7.9%, and that "a long-term decline in returns can be expected".
Struggling to maintain income
The combination of falling annuity rates and rising inflation, which the Bank of England says could hit 5% by the end of the year, means pensioners are increasingly struggling to maintain a 'real' income. The average conventional annuity rate in June 2011 was just over 1% ahead of the retail prices index, according to MGM Advantage data; 18 months earlier it was over 3% ahead of RPI.
These are alarming trends - and complicated further for people just about to retire now by the recent plunge in stockmarkets. As Billy Burrows explains, while you wait for the market to rebound and boost the value of your pension pot, rates could slip further.
"Those intending to purchase an annuity in the near future may be advised to do so before insurance companies cut annuity rates again," he adds.