Annuity rates drop; those retiring need financial advice

Annuity rates - which determine the value of private pensions – dropped to their lowest level in three years in August, according to recent research.

The average standard annuity rate fell by 2.6% in August alone. This means those who are retiring now and buying an annuity, are likely to receive a lower annual income compared to the amount offered to retirees three years ago.

The fall in annuity rates has been attributed to a drop in gilt yields, which is the interest paid out on government bonds, but has also been linked to a fall in demand from people wanting to buy annuities.

Annuities were the traditional way in which many people retiring managed their money, exchanging their lump sum saved in return for a regular ‘pension’ income for life. This has now changed.

In the 2014 budget, a number of ‘pension freedom’ changes were announced giving those with private pensions more access to their savings at retirement. This included the option to withdraw all of a pension fund as cash, but more sensibly, providing a range of alternative ways to generate an income through investments. More consumer choice has led to a fall in the popularity of annuities.

Most of these new pension powers come into effect in 2015. Once fully in place, the consumer will have more freedom and flexibility as to how they can access their pension savings more than ever before.

In order to take full advantage of the potential flexibility it’s important to understand the full implications of any decisions. HMRC, in particular, will take a very close interest in how benefits are taken and when.

With annuity rates at a three year low point, it is important that those approaching retirement consider all the new options carefully.

Many people have decided to defer their retirement plans until next year because of the pension rule changes, and for many people this is probably the right thing to do.

An annuity may still prove to be the right route to taking your retirement income for many people. However, with rates at a low point, shopping around annuity providers to find the best income has never been so important.

Making the most of your pension fund represents one of the most important decisions you need to make. It is important that you speak to your financial planner regularly about your retirement plans, if you don’t have an appointed adviser please email us at letstalk@sanlam.co.uk.

This article is for information purposes and should not be treated as advice. Individual circumstances should always be considered prior to purchasing any financial products. For further information please contact your Wealth Planner.

Sanlam is a trading name of Sanlam Wealth Planning UK Ltd (Reg. in England 3879955) and English Mutual Ltd (Reg. in England 6685913). English Mutual Ltd is an appointed representative of Sanlam Wealth Planning UK Ltd which is authorised and regulated by the Financial Conduct Authority.