Annuity 

Annuity income rates fall again

Annuity income rates fall again

Annuity rates have shown a decline in Q1 with the average standard annuity income falling to its lowest level since 2017.

According to Moneyfacts' UK personal pension trends treasury report, income from an average annual standard level without guarantee annuity decreased by 1.4 per cent in the first three months of the year.

This was based on income for a 65-year old with a £10,000 pension pot. At the higher purchase price of £50,000, the average standard annuity income fell by 1.8 per cent.

This latest fall means that such income is at its lowest level since October 2017 and has fallen by 4.3 per cent since the introduction of the pension freedoms in April 2015.

Andrew Tully, technical director at Canada Life, said rates had been pushed down by falling gilt yields in the first quarter and were now recovering.

He said: "Annuity rates have recovered from the lows of 2016, but prices are driven by competitive pressures and the yields available from gilts. Until we see an increase in yields, annuity rates are unlikely to shift significantly upwards. 

"People may want to phase the purchase of the annuity to avoid locking into a rate on one day. Phasing also has the advantage that people are likely to get better rates as they get older."

Calendar year

Average pension fund growth (per cent)

Average annuity income change (per cent)

Q1 2019

6.70

-1.40

Q4 2018

-7.30

-0.60

Q3 2018

0.90

-1.00

Q2 2018

4.40

0.60

Q1 2018

-3.80

0.80

Despite the fall in rates, Mr Tully said annuities continue to be valued by clients who want the certainty of a guaranteed income.

He said: "Increasingly annuities are being used in new ways with the longer guarantees now available, and typically with larger pension values.

"People are also looking to blend annuities with drawdown to get the best of both worlds, creating certainty and retaining flexibility."

Average rate change (per cent)

Jan 19

Feb 19

Mar 19

Standard annuity £10K

-0.2

0.6

-1.9

Standard annuity £50K

-0.1

0.03

-1.7

Enhanced annuity £10K

0.0

-0.3

0

Enhanced annuity £50K

0.0

-1.5

-0.10

The research also found that the average retirement income for a person contributing £100 per month into the average pension fund over a 20-year period and retiring at 65 with a standard level without guarantee annuity increased by 3.9 per cent during Q1 2019. 

This rise is due to stronger pension fund returns which offset the reductions in annuity income.

Richard Eagling, head of pensions at Moneyfacts, said: "Despite this latest increase, average retirement incomes remain lower than a decade ago, reinforcing the need to improve consumer engagement with pensions and highlighting why the government is keen to introduce new legislation to facilitate alternatives to the traditional choice between defined contribution and defined benefit pension schemes."

Meanwhile, in Q4 2018, the average pension fund fell by 7.3 per cent and due to this pension funds suffered their biggest losses last year since the 2008 financial crisis. In the first quarter of 2019 the average pension fund increased by 6.7 per cent.

amy.austin@ft.com