Annuity rates are on track to post their biggest ever annual fall, according to new research compiled by Moneyfacts.
The data provider looked at how annuity rates for a healthy 65-year-old male with £50,000 had changed since the start of 2016. Moneyfacts found that rates had declined by 15% year-to-date.
As the table below shows, unless there is a strong recovery in annuity rates in the remaining three months of the year, 2016 is set to be marked out as the worst ever year for annuities.
Record low gilt yields, with the benchmark 10-year UK government bond yield slipping below 1 per cent for the first time ever in late June, have been the main driver behind annuity providers cutting rates.
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Most providers buy this type of bond to provide the fixed income they pay to policyholders. As a consequence, rates for those purchasing an annuity are negatively affected when gilt yields decline.
Brexit has had a big impact. Before the EU referendum result the 10-year UK government bond yield was 1.37%, but today the yield is 0.92%. At one point last month the yield slipped to as low as 0.53%.
Richard Eagling, head of pensions at Moneyfacts, said: 'It has been a truly awful year for annuity rates, with rates falling to all-time lows.
'This is particularly disappointing as the stock market volatility that we are experiencing has re-emphasised the importance of a secure lifetime income for many retirees.
"Unfortunately, record low gilt yields following the EU referendum result and a significant weakening of competition in the annuity market have both exerted considerable downward pressure on annuity rates during 2016."
Average annual change in pension annuity income since 2006
|Calendar year||Average annual change in annuity income (%)|
Source: Investment Life and Pensions Moneyfacts. Figures based on a male aged 65 purchasing a standard level without guaranteed annuity.
How falling gilt yields have hit annuities
Annuity rates have been in decline for 20-odd years, due to the fact that people are living longer.
As a result insurers have become less generous, but the decline intensified during the financial crisis, which pushed both gilt yields and interest rates down to record low levels.
Another factor has been quantitative easing (in which the government buys bonds, pushing down yields), which again has had an adverse impact on the gilt market and therefore annuity rates.
Before the crisis struck, the 10-year UK government bond yield was above 5 per cent. It is now 0.92%.
When annuity rates peaked in 1990, a healthy 65-year-old man with £100,000 received £15,000 a year; today he will pocket less than £5,000.
This story was originally written for our sister magazine, Money Observer.