Time to take another look at annuities
They have been falling due to the fact that the yields on gilts which are the benchmark for annuity pricing have fallen to an all-time low, and people are living longer so companies cut the amount they have to pay out.
Based on a benchmark annuity (standard, level without guarantee), the average annuity income for a 65-year-old male fell by 4.1% during the third quarter of 2012 and by an even greater margin of 4.8% for a 65-year-old female.
These rates – which determine the level of income you secure – will be tweaked further when the Gender Directive takes effect next month. This ruling means providers must offer the same rates to men and women.
There are many different annuity providers offering different types of policy and so without shopping around you might get a poor deal.
The Association of British Insurers (ABI) has proposed a step to helping those approaching retirement find the best income. From March, it wants all insurers to publish annuity rates, including firms such as Pearl or Windsor Life which, while providing annuities to existing customers, do not compete in the open market and so do not disclose rates.
The tables will appear on the ABI website and are likely to include a limited range of variables, such as age and whether the applicant is a smoker.
A spokesman for one specialist annuity broker said: “It is crucial that consumers get clear information and can make simple comparisons on what is available.
“They are dealing with an unfair and opaque system, which is preventing too many people from securing a good retirement income.
“The ABI's proposals are a first step, but we believe that more can be done to help people to shop around for the best annuity, including making advice and support part of the scheme itself so that there is a true default open market option in place.”
The mistake many people make is taking an annuity from the company where they hold their pension savings. This is the easy option but is unlikely to offer the best rates. You should be able to secure a more generous income elsewhere.
As well as shopping around, you may also be able to benefit from better rates if you smoke, have high blood pressure, or suffer from one of a wide range of ailments when you retire, as you will qualify for an enhanced annuity that pays out more because the provider will not expect to have to pay out for as long.
Another annuities specialist added: “We’ve seen significant movement in the annuity market over the last month, with smokers rates particularly hard hit. With most annuity rates falling and gender equalisation round the corner, it is more important than ever that those looking to buy an annuity compare quotes from all providers before making any decisions. When buying your annuity, any mistakes can potentially affect you for the rest of your life, so make sure you get it right the first time.”
Income drawdown has been popular with pension savers who do not want to be locked into an annuity that offers no prospect of future capital growth. Industry experts estimate there is about £20 billion invested in these funds where savers in retirement keep their pension pots invested and draw a monthly income.
But those who have already chosen drawdown face cuts to their income thanks to unexpected changes made to drawdown arrangements by the Government last year.
About 400,000 individuals have set up their pensions on this basis, so they could keep their fund intact while drawing an income rather than buying a poor value annuity that they are locked into for life. The government argues that individuals were taking too much income, depleting their pension pots too quickly.
* Holly Thomas is the deputy personal finance editor of The Sunday Times.