Research from Investment Life and Pensions Moneyfacts has revealed annuity rates experienced their biggest monthly fall for three years during August.
The figures show the average annual income from a level annuity for a 65-year-old without guarantee, based on a £50,000 pension pot, fell by 2.6 per cent during the month from £2,874 to £2,797.
Over a 20-year retirement this equates to £1,540 less income and represents the biggest monthly fall in annuity income since August 2011, leaving annuity income down by 3.2 per cent since the start of the year, the firm added.
Enhanced annuities fell by a more modest 1.3 per cent, although the report noted that enhanced annuity rates have fallen much more steeply than standard annuity rates in previous months.
Moneyfacts put forward two main factors behind the recent downturn: a reduction in 15-year gilt yields from 3.05 per cent to 2.7 per cent during August, and the growing pressure on providers to cut rates in response to lower demand since the Budget proposals.
Malcolm McLean, senior consultant at Barnett Waddingham, agreed, saying: “The greater freedoms announced in the 2014 Budget have... clearly had a major impact on the demand for annuities, which in turn will undoubtedly influence providers in cutting their rates.”
Paul Keeble, head of media relations at annuity provider MGM Advantage, also suggested rate moves are in the main annuity players responding to changing market conditions.
As an example of the pressure on providers, earlier this week insurer LV announced half year results which revealed first half profit before tax had almost halved to £47m as a result of lower margins on enhanced annuities and increased sales of less profitable fixed term annuities.
Richard Eagling, head of pensions at Investment Life and Pensions Moneyfacts, said: “A fall in annuity rates of the magnitude that we saw in August is unusual, but a significant reduction in gilt yields combined with falling demand has left annuity providers with little room for manoeuvre.
“These are testing times for the annuity market and we expect that pricing annuities will remain challenging until the new pension freedoms are introduced next April.
“Although many individuals approaching retirement will be looking to postpone their decision on how to take a retirement income until then, the significant fall in annuity income that we saw last month will be felt by those who require a guaranteed, secure income now.”
Mr McLean said: “The timing of all this is most unfortunate given that it will turn more retirees against annuities in preference for drawing cash from their pensions funds, which for many people may not be always be the best value option to pursue in the long-term.”
Mr Eagling said: “All this points to people needing to seek advice and ensure they shop around if they are looking for a guaranteed lifetime income using an annuity.”
