Should low rates stop me buying an annuity?

Prior to the pension changes, most people decided on buying an annuity to provide a retirement income. Now there are more options, but annuities are still available and are likely to remain popular products. However, according to research from MoneyFacts, annuity rates are at an all-time low, so it’s essential to shop around when looking for a quote.

Annuity rates have been declining for years – in 2014 the average annual income payable for a standard annuity fell by 5.7%. Since the start of this year, the average annual income payable for a standard annuity purchased with a fund of £50,000 has dropped by 6.4%. 

Rates for enhanced annuities have also fallen, with a 6% drop in annual income payable from a £50,000 fund.

Of course, those who have already purchased annuities at higher rates will be unaffected by this news, but it will be particularly disappointing for the people who waited until the pension freedoms took effect before buying an annuity, as they could have secured a higher rate the earlier they purchased.

Why are annuity rates falling?

The two main factors for a decline in annuity rates are a reduction in demand and falling gilt yields, which have hit historic lows in recent years:

This does not mean that you should not consider buying an annuity, though – guaranteed income through retirement can relieve a big concern for consumers, so they remain an appropriate product for many people. Although demand has been falling, with 55.5% fewer annuities sold in March 2015 than a year earlier, the financial services software firm Iress predicts that the rate of decline could slow down. Its report found that although the year-on-year drop was 57.6%, the number of people buying an annuity in the first quarter of 2015 was 11.3% higher than the last quarter of 2014.

Interestingly, the sales of enhanced annuities are at their highest for over three years, with more than a third of annuities sold in the last quarter being enhanced.

Reduced annuity sales could simply be the market adjusting itself after the revolutionary pension changes took effect. A drop in sales in the run-up to these changes is perhaps unsurprising, and an uptake in the first quarter of the year could prove that annuities are not going anywhere.

Have your retirement plans changed with the introduction of the pension freedoms, or will you still be buying an annuity?


Call 0800 304 7288 for a friendly chat about your pension

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

We are really looking forward to reading your comments. Before you start writing, please just remember that everything you write will be displayed publically – including your name. Not sure what sort of thing you can write, and what sort of things you should avoid? Please have a quick read of our social rules for guidance.

Back to top