Annuity rates hit by 14% fall

The Momentum UK Team 26 September 2011

Some pensioners are facing huge losses to the amount that they may receive as a pension income on purchasing an annuity, due to the poor state of the market.

As a result of recent market turmoil, the pension income that can be bought from a retirmement fund has fallen by 14% according to recent figures.

Annuities provide a regular income in return for an upfront sum, and are usually paid for on retirement using a pension fund that has been built up over a lifetime of contributions. Annuity rates for each individual will depend on the amount in their pension fund, and a number of personal factors, but the amount will also be based on current overall annuity rates.

The higher the current annuity rates, the more you are likely to receive as an annual income on retirement.

The stockbroker firm HL has released figures suggesting that the value of annuities has dropped significantly since 2008. A pension pot of £100,000 that could have bought a 65 year old man an annual income of £7855.00, could today only buy an annual income of £6201.00- assuming that the annuity purchased was neither linked to inflation, nor paid a widowers pension.

Only those on final salary related pension schemes are lucky enough to find themselves unaffected, while those taking out joint annuities and index-linked annuities have also seen a dip in rates.

This loss comes as bad news to pensioners who have taken all the right steps towards stability in retirement by making regular contributions into a pension fund, only to see its value collapse.

Annuity rates are linked to government bonds known as gilts. One of the reasons that rates are falling is because the interest rates of gilts have also reached an all time low.

However, it may not all be doom and gloom for retirees, even though annuity rates have been in steady decline over recent decades, retireees may still improve their annuity rates by shopping around.

It is also important to remember that there are no guarantees over where annuity rates will go next. Rates may still rise as well as fall with the tempermental market, and the future remains difficult to predict.