Just weeks after the new pension reforms came into force, annuity rates have dropped to an all-time low.
An annuity is a contract between you and an insurance company. In return for a lump sum from a pension fund, the insurance company guarantees to pay you a regular income for the rest of your life. For some time, annuities have declined in popularity amongst savers. However, a recent study by Moneyfacts will provide an ever bigger blow to the already struggling industry. Their research highlighted that the average annual income available on a standard annuity for a 65 year-old with a pension worth £10,000 has plummeted by 5.9%, whilst the rates for a pot worth £50,000 have reduced by 6.4%.
Following the changes to the UK pension industry, there is now no longer a requirement to purchase an annuity when you enter retirement, instead you can explore alternative avenues. The increased freedom given to those accessing their pension savings, combined with a sharp fall in gilt yields are both major factors that have contributed to the current poor performing rates.
However, in spite of their unpopularity, research has shown that when people are asked what features they are looking for from retirement products, a source of income that is guaranteed to last for the rest of their life is a key requirement.
Taking the recent headlines into account, are annuities still a viable option to help achieve this goal?
The answer really depends on individual circumstances. For example, how much money do you require to achieve your dream retirement? Do you have other sources of income to supplement an annuity payment?
Many find the idea of an annuity comforting, but what you gain from peace of mind, you could lose in potential returns from your heard-earned savings, especially when rates are at their current level.
There is still a place for annuities in the pension industry, but with the reforms now in place, retirees have more opportunity than ever before to create a diverse, flexible retirement portfolio. Therefore, it is essential to evaluate the options available to you before purchasing an annuity and risking the historically low returns.