Annuity rates increased significantly last year – the first time that retirement income had increased since 2007. But 2014 is off to a bad start, as rates have already fallen in the month of January.
Those approaching retirement only get one opportunity to secure the rate at which they secure their retirement income, so this is bad news for any workers retiring in the near future.
After falling to an all-time low in March 2013, annuity rates rose 10% over the course of 2013 thanks to rising Gilt yields and increased competition in the annuity market.
A report by Investment Life and Pensions Moneyfacts revealed that a standard level without guarantee annuity for a 65 year old rose by 9.1% based on a £10,000 purchase price and by 10.5% based on a £50,000 purchase price during 2013. This was the largest increase since the report began in 1994.
But this trend has now worryingly reversed according to the latest rates from the Annuity Bureau. The most competitive single standard level annuity was provided by Legal & General – but even this top-level income had decreased 2.25% in just one month. Joint life annuity payments from Prudential have decreased 2.6%.
James Auty, head of The Annuity Bureau from JLT, explained that insurers purchase government bonds (gilts) to back the annuities they sell, so if the price of bonds falls, then they can offer more competitive rates.
He blamed emerging market turbulence for the fall in bond yields – and an increase in the price of gilts.
“Much of the money taken out of developed and emerging equities moved into safer assets like UK government bonds,” he said. “This led to an increase in demand and a corresponding increase in price. This pushed down annuity rates leading to poorer value for individuals retiring during the month.”
The fall in annuity rates comes as MetLife revealed one in five Britons have had to stop contributing to a pension due to the cost of living.
According to the insurance company the average pension saver has reduced their contributions by £900 a year – and those reducing the most were aged 35 to 44.
Thanks to other financial pressures pension savers are taking a contributions holiday, which can have devastating effects over the long term. Missed payments during the growth stage of retirement saving mean that consumers miss out on the essential effects of compound interest and £900 missed in 2014 can mean a loss of thousands when savers retire.