More evidence has emerged of the hit to annuity rates in the wake of the Budget pension reform announcement, with research from Towers Watson finding that members of workplace schemes have seen offered rates decline by more than 3 per cent since March.
The consultancy found the best available annuity offered to a 65 year old looking for a single income from a DC pension pot worth £25,000 has declined by 3.3 per cent since the Budget, from £1,508 per year in March to £1,458 in August.
For larger pension pots the decline has been less significant, with a £50,000 DC pot declining by 1.8 per cent and a £100,000 pot decreasing by 0.8 per cent.
The results come just a day after Investment Life and Pensions Moneyfacts revealed annuity rates had experienced their biggest monthly fall for three years during August, with the average income from a £50,000 level annuity for a 65-year-old without guarantee falling 2.6 per cent 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.
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.
Mr Aitken commented that given how markets have moved, he would have expected rates to have got slightly worse. “But it’s interesting to see the varied impact the chancellor’s Budget has had on annuity rates, depending on the size of a person’s pension pot.
“Someone reaching retirement with a fund of £100,000 is still more than likely to buy a secure annuity income, but someone with £25,000 has a far more difficult decision.
“If they do opt for an annuity it’s likely to be because they are in good health and are anticipating a relatively long retirement, suggesting their annuity will be paid for longer than average. This would explain the accelerated decline in annuity income for smaller funds.”
Also yesterday, the ABI revealed that sales of annuities have fallen by more than a third between the first and second quarter of 2014, with a corresponding increase in sales of income drawdown contracts and with a smaller average pot size than before.
A Towers Watson survey of 92 employers found UK businesses are predicting that just 40 per cent employees will buy an annuity at retirement next April. A third thought that fewer than a quarter of employees would do so, while 29 per cent put the figure at less than half.
Will Aitken, senior consultant at Towers Watson, said: “Clearly a lot of companies are preparing for employees to explore alternative income options once they reach retirement, but the picture is still very mixed from company to company.”
Further research of the annuities market by the firm found that incomes offered to retirees looking to purchase an annuity have started to decline since the Budget announcement, particularly for people with smaller defined contribution pension pots.
