Annuities have suffered their worst year on record, with payouts to newly retiring pensioners falling by 15% so far during 2016, according to data provider Moneyfacts.
Annuities are an income for life, whereby those retiring can swap their pension savings accumulated while at work for an agreed fixed income, paid out every year until they die.
Moneyfacts said that the average annuity income for a 65-year-old had fallen by 14.8% on a £10,000 purchase price and by 15% on a £50,000 purchase price so far in 2016. The figures are based on a pensioner buying a flat-rate annuity that does not increase with inflation.
Annuity rates are largely influenced by two factors: interest rates and the longevity prospects of the population. The Bank of England base rate cut after the Brexit vote and the prospect of negative interest rates have pushed the incomes paid on annuities to levels unthinkable even a few years ago.
Richard Eagling of Moneyfacts said: “2016 has been a truly awful year for annuities, with rates falling to all-time lows. This is particularly disappointing as the stock market volatility that we are experiencing has re-emphasised the importance of a secure lifetime income for many retirees.
“Unfortunately, record low gilt yields following the EU referendum result, the impact of Solvency II legislation and a significant weakening of competition in the annuity market have all exerted considerable downward pressure on annuity rates during 2016.”
The falls in annuity rates easily surpass the previous largest annual annuity income drop of 11.5% recorded in 2012.
Moneyfacts said that although there were more than three months of the year remaining, it was unlikely that the current economic environment would facilitate a strong enough recovery in annuity rates to avoid it picking up the tag of being the worst ever year for annuity rates.
Workers reaching retirement age without the protection of a salary-based pension have to rely on what they can earn from their savings. Under new pension freedom rules, they are allowed to access their pension savings from the age of 55, but need to closely examine the tax implications.
Most financial advisers reckon that a safe level of draw-down from savings is around 4% a year. But this suggests that a pensioner needs to accumulate £250,000 in savings to be sure of an income of £10,000 a year.