Enhanced annuity income slashed since pension freedoms

Enhanced annuity income slashed since pension freedoms

Income from enhanced annuities has been hit up to six times harder than standard annuity income since the pension freedoms were introduced, according to a Moneyfacts report.

Data from Moneyfacts showed in the years since April 2015 the average annual enhanced annuity income has fallen between 10.2 per cent and 14.2 per cent for a 65-year-old (depending on purchase price) and between 11.7 per cent and 15.6 per cent for a 70-year-old. 

By contrast, standard annuity income fell between 2.6 per cent and 3.2 per cent during the time period.

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The gap between the products was even more pronounced in 2017, according to the report, which saw enhanced annuity rates fall, whereas standard annuity rates rose.

Moneyfacts collects its underlying data directly from open market providers, which notify it daily of any rate changes and pricing changes. 

The figures, which capture data up to 1 January, were based on seven providers offering 11 pension annuity products -  six in the standard and five in the enhanced market.

Richard Eagling, head of pensions at Moneyfacts, said: "Before pension freedoms were introduced the enhanced annuity market was functioning well, with healthy competition ensuring typical uplifts of around 21 per cent. 

"However, it is difficult to escape the conclusion that the enhanced annuity market has been more adversely impacted by pension freedoms than the standard annuity market, meaning poorer retirement outcomes for those with shorter life expectancies retiring now than pre-April 2015.

"Nevertheless, it still remains the case that enhanced annuities offer valuable extra income for those who qualify for them, so they should not be overlooked."

Moneyfacts found the average annual enhanced annuity income without guarantee for a 65-year-old fell between 4.8 per cent and 5.8 per cent in 2017, depending on the purchase price.

At the higher age of 70, it fell about 6.8 per cent, while at age 75 the reduction was between 5.3 per cent and 9.9 per cent. 

Overall, average enhanced annuity income decreased in all but 17 of the 170 enhanced annuity scenarios analysed by Moneyfacts during 2017.

Meanwhile, the average annual income for a standard without guarantee annuity for a 65-year-old increased 1.07 per cent based on a £10,000 pension pot in 2017, and 1.66 per cent for a £50,000 pension pot, Moneyfacts stated.

As a result, 2017 was the first calendar year since 2013 that standard annuity rates had actually increased.

Moneyfacts said income from the products has increased 13 per cent since hitting an all-time low in September 2016 in the aftermath of the European Union referendum result.

Data from Hargreaves Lansdown, released in November, already indicated the market was recovering, as there were eight rate changes in the month to 23 November alone.

The fact that standard annuity rates edged up during 2017 while enhanced rates fell means that the uplift offered by an enhanced annuity is now greatly reduced, Moneyfacts reported.

During the fourth quarter of 2017 the average uplift fell from 16.7 per cent to 12.1 per cent, its lowest level since January 2013, when enhanced annuity providers adopted ultra-cautious pricing following the switch to gender neutral rates.