Annuity rates fell in 2009 and now offer poor returns, latest research shows

News - Savings

Written by Ray Clancy

Wednesday, 27 January 2010 09:19

Annuity rates fell by an average of over 1.5% in the latter half of 2009 with standard annuities seeing the fastest rate of decline, according to the latest figures to be published.

Average annuity rates fell 1.64% in the six months to 31 December 2009, with enhanced rates down 1.33%, while standard rates dropped 2.16%, the Annuity Index from MGM Advantage Shows.

The index, which tracks the income paid on standard and enhanced annuities, shows there is a huge amount of volatility in the market. The difference between top quartile and bottom quartile income payments has widened as standard rates in particular have fallen. In June, the average difference for men was 31.6%, but by November this rose to 34.7%. The corresponding figures for women are 33.45% and 34.12%.

Average enhanced annuities now pay around 22.7% more than standard annuities, compared to 21.5% in June 2009. This would mean an income difference over five years of £3,776 for the average man purchasing a £50,000 annuity, and £3,425 for a woman, the data also shows.

‘Choosing an annuity is one of the most important financial decisions you will ever make, and you owe it to yourself to seek professional advice to help you find the best deal for you. It could have a huge impact on the quality of your life in retirement. There is a huge amount of volatility in the annuity market and rates are changing quickly,’ said Craig Fazzini-Jones, director of MGM Advantage.

The research shows investors are getting poor rates from conventional annuities, according to Mark Stopard, head of marketing at Sun Life Financial of Canada. ‘The drop in the average rate achievable underlines the need for consumers and advisers to explore all the options open to them at retirement stage, which includes drawdown and more flexible retirement solutions,’ he said, reacting to the Index figures.

‘We know that the variable annuities market is expected to grow in the UK. Indeed, our recent research shows that over half of advisers expect to catch onto the benefits in the coming years, with over two thirds expecting new providers to enter the market,’ he continued.

‘Just as consumers should challenge being offered the default annuity from their pension provider, they should work with their adviser to understand their own needs, what their retirement is going to look like and how this can be funded most effectively,’ Stopard added.