Interactive Investor

Annuity rates collapse in "horror show" for retirees looking for income

4th September 2019 08:58

Edmund Greaves from interactive investor


Share on

Annuity rates for the average 65-year-old have dropped by 14% in 2019, a spectacular decline

Annuity rates have fallen to some of their lowest ever levels, and currently have only been lower than now for a period of nine weeks.

An average 65-year-old can now buy an annual income of £4,654 using a £100,000 pension. This is £759 less than at the beginning of the year, according to Hargreaves Lansdown.

Rates have changed 46 times this year, mostly plunging downwards.

The table below shows the income available now to a person with a £100,000 pension, at different ages:

Age 60 65 70 75
Income at the start of the year £4,776 £5,413 £6,099 £7,055
Income now £4,051 £4,654 £5,443 £6,419
Change (£) -£725 -£759 -£656 -£636
Change (%) -15% -14% -11% -9%

Source: Hargreaves Lansdown, 4 September 2019

Nathan Long, senior analyst at Hargreaves Lansdown, comments: “This year has been nothing short of a horror show for soon-to-be retirees. Annuity rates have been cut with great regularity with the best on offer now 14% lower for a 65-year-old than at the start of the year.

“Fears of a no-deal Brexit and a slowdown in the global economy have increased the cost of buying the secure investments that insurers use to underpin annuity payouts. It’s currently making keeping your pension invested look more attractive than it probably should do.”

There are currently 116 investment funds that pay a higher income than the current average annuity rate available. Of these, 32 pay a monthly income while 48 pay quarterly.

But this can prove challenging for retirees as the question of where to invest is compounded by questions over how much to draw down from the pension fund.

Mr Long adds: “Anyone coming up to retirement needs to choose their options carefully. It’s unlikely to be best to buy an annuity when you’re still working, but when you finally retire permanently a combination of secure income to cover the essentials and drawdown for the nice-to-haves is a solid approach.

“For those who just cannot bring themselves to buy an annuity at these low levels, taking only the income produced by your pension investments is a sustainable way of drawing from your pension. There are plenty of funds available that can pay high income levels, but ensuring you have a spread of funds to provide income in retirement is sensible.

“Using tranches of your pension to buy annuities as you get older helps you to spread the risk of buying when annuity rates are low. You can benefit as annuities generally pay more as you get older and any health conditions that develop can be factored in, which can also boost the payouts.”

Moneywise curates an annually-updated list of top investment funds, including various income funds such as Vanguard FTSE Equity Income Index, Royal London Global Bond Opportunities and Murray International Trust.

Found out more in the Moneywise First 50 Funds guide.

This article was originally published in our sister magazine Moneywise, which ceased publication in August 2020.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Get more news and expert articles direct to your inbox

Sign up for a free research account to get the latest news and discussion, and create your own virtual portfolio.

Free Sign Up