Pension income dropping

13 November 2012

Annuity rates have fallen by 20% over the past three years, as a result of government action to keep interest rates low and inflation under control.

In August 2009, a healthy 65-year-old man with a £100,000 pension pot would have got an annuity of £6,410, according to a report by annuity experts MGM Advantage. But now that same man would receive an average annuity income of just £5,158 - £1,252 less than if he had bought it three years earlier.

Aston Goodey, distribution and marketing director at MGM Advantage, warns that "annuity prices are in free fall", as rates for a standard annuity have fallen by 7% in just the three months from June to September.

An annuity is an insurance policy you buy upon retirement with your pension pot, and it pays you a set income for the rest of your life. So, falling rates mean poorer pensioners.

Annuity rates are based on the returns of 15-year government bonds, known as gilts, which have fallen following the Bank of England’s quantitative easing programme, which involved the purchase of gilts in an effort to inject money into the economy and control inflation.

Find the best annuity rate for your circumstances

So what can you do?

With annuity rates now lower than ever it is very important that you compare rates before you buy one.

Many soon-to-be retirees simply buy an annuity from the company that holds their pension. But shopping around is essential as the difference between the best and worst rate could be as much as 50%, according to Rob Tinsley, spokesperson for Aspire to Retire.

The decision is also irreversible so it’s vital that you get the best possible annuity rate available to you. Otherwise your golden years may end up tarnished.

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