Annuity rates have fallen to their lowest level since records began in 1994, with income payable down by over 10% since the beginning of the year.
Yet despite the 25-year low, driven by a fall in gilt yields and longer life expectancy, providers believe annuities continue to pose an attractive option for those approaching retirement.
Commenting on the latest annuity figures, Steven Cameron, pensions director at Aegon, said: “The perceived poor value of annuities was one of the drivers behind the pension freedoms. These opened up a new world of flexibility to all those with defined contribution pension pots, allowing people to choose to remain invested and draw an income of as little or as much whenever they chose from as early as age 55.
“While drawdown comes with many benefits compared to annuities, it also presents new risks to consumers. The major benefit of an annuity is it provides a guaranteed income for however long someone lives.”
With an increasing number of people looking to transition into retirement by working reduced hours and supplementing their income with their pension, Cameron said drawdown carries the risk of pension pots running out if too much income is taken or investments don’t perform as well as hoped.
He added: “For many, it’s not an either / or choice. Some will use part of their pension pot to buy an annuity, providing enough guaranteed income to cover retirement essentials, leaving the rest invested in drawdown to be used flexibly as and when required. Once in drawdown, there’s also the opportunity at any time to use any remaining funds to buy an annuity.
“While it’s not possible to tell with any certainty, it’s possible that a future Government will fund increased public spending with greater public debt, which could lead to gilt yields rising in future years, and in turn annuity rates rising from their current all-time low.”
New research from Canada Life also found that the vast majority of those approaching retirement value a guaranteed lifetime income, despite taking advantage of the pension freedoms.
More than four fifths (83%) of over-55s who have used pension freedoms to access their pension pots say they want the state pension to deliver a lifetime income in retirement. Just 8% of those polled would choose to take the State Pension as a lump sum at retirement if the option was available.
Andrew Tully, technical director at Canada Life UK, said the results showed people preferred to have a “safety net”. While the option of taking the state pension as a lump sum is not available, Canada Life said the findings from the study showed how much value people place upon a regular income to provide peace of mind or pay the bills.
Tully commented: “Drawing comparisons with pension freedoms is interesting as we know there has been a significant shift away from annuities towards income drawdown over the past four years. And yet people shouldn’t view it as a binary choice between the two as you can blend drawdown and annuities to get the best of both worlds, security and flexibility.”
