Record drop in annuity rates risks success of auto-enrolment

Thursday, 11 October 2012 07:56

By Ben Salisbury

New research from MGM Advantage reveals that annuity rates have fallen by a further seven per cent in just three months.

The research shows that a 65-year-old man with a pension pot of £50,000 would now be able to secure a retirement income through purchasing an annuity of just £2,579 a year, compared to £2,778 in July.

According to MGM, this is the highest quarterly drop since August 2009 when the firm started tracking rates.

Malcolm McLean, a consultant, from Barnett Waddingham, said that the annuities market has fallen to such a level that investors have genuine concerns that they won't even get the money back that they put in in the first place.

He said: "At a time when millions are being enrolled in pension plans that culminate in the purchase of an annuity this sends out some very negative vibes and risks jeopardising the success of the entire auto-enrolment project.

"There may be no single easy solution to the present dilemma but in the final analysis some freeing up of the restrictions on how pension pot money may be used may become necessary before the annuity crisis spirals completely out of control."

The research shows the problem facing people planning to retire shortly of the declining returns available to them through purchasing an annuity with their pension pot.

Annuities are purchased to provide an annual income that pensioners will rely on for life. Pensioners are already struggling to secure material rates of returns on savings income as it is pegged back by inflation.

Many commentators have put the blame on declining annuity rates on the Bank of England’s policy of quantitative easing (QE).

They say that this policy has forced down the value of gilt yields which dictate the rate that pension companies pay out on annuities.

QE works by allowing the central bank to pump new money into the economy which is used to buy government bonds, known as gilts. This increases demand for gilts which lowers the interest paid on the loans, known as the yields.

Dr Ros Altmann, Director General at Saga said: "As well reducing spending amongst older people, QE has also has decimated corporate pension funds, forcing some firms into bankruptcy while others have had to divert resources into supporting their pension schemes rather than business expansion.

"On top of this, QE has reduced over a million pensioners' incomes via annuity and drawdown income falls.”

Malcolm McLean, a consultant, from Barnett Waddingham, said that the figures from MGM Advantage show that the current situation puts people in retirement “in an almost impossible situation not knowing whether to delay taking an annuity or bite the bullet and go for one now albeit at very poor returns.”

In the last three years there has been a 20 per cent fall in what an annuity can buy as an annual income. MGM says that this means the value of what an individual with a £50,000 pension pot can buy has fallen by £630 since 2009. 

Mr McLean said: “We must now be heading towards a tipping point where annuities barely return the capital given up over an average life expectancy and thus in the eyes of most people represent an unacceptably poor investment of their pension savings.”

Joanne Segars, head of the National Association of Pension Funds said: “With another round of quantitative easing being signalled, annuity rates could fall even further.

“Those who need to get an annuity must scour the market for the best deal. Spending time shopping around can make a big difference, and too many people do not realise that health and lifestyle factors might get them an enhanced rate.”

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