Annuity rates are dreadful. It cannot be dressed up or made to look more appealing; the simple fact is they are just not very good.
When rates peaked in 1990, a single-life 65-year-old male with a £100,000 pot, selecting a five-year guarantee and a level income, could obtain around £15,000 a year. Today, the same example would get little more than a third of that.
And there is little sign of things improving. Those approaching retirement are having to gamble with their pension pots, forced to choose between locking in now at a low rate or risk waiting and rates falling even further.
But things are not all bad. According to MGM Advantage, average annuity rates crept up in the first quarter of 2013, albeit only by 3 per cent. This is most likely down to the impact of the gender directive, implemented from December 2012 and barring insurers from using gender as a pricing metric.
Annuity providers are still repositioning themselves on a neutrality basis and, given that other external influences have improved little, the slight rate improvement probably does not represent the start of a long-term rally. The ongoing impact of annuity pricing is yet to be seen as insurers look for other ways to assess the risk of a particular individual.
Poor annuity rates are just one of a host of retirement problems. People are not saving enough – although the recent introduction of auto-enrolment hopes to address this, at least in part – and many have argued the onset of the RDR will limit access to advice that could help improve retirement savings even further.
Chart 1 demonstrates the stark difference between outcomes for advised and non-advised retirement savings. A recent report by HSBC, The Future of Retirement – A new reality, was based on 15,000 individuals in 15 countries and demonstrates that across all age groups and income levels, average retirement savings held are significantly higher if an individual uses a professional adviser. For those aged between 55 and 64, those seeking advice hold almost double that of non-advised individuals.
The average non-advised pot, according to the study, is just £63,703. In contrast, advised individuals held an average of £132,098 in retirement savings. Even this would buy very little.
Chart 2 shows data from MGM indicating annuity income for a 65-year-old male with a £100,000 pot over six years. In 2007 the pot would have bought an income of £7,140 a year; in 2013, the same amount would yield just £5,220 pa, a 27 per cent fall.
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