Annuity rates fall to record lows after sweeping pension reforms

Annuity rates for savers who want to turn their pension money into a secure income have fallen to record lows just weeks after sweeping pension reforms came into force.

According to data published on Thursday, average income for a single-life annuity for a 65-year-old with a pension pot of £10,000 has fallen by 5.9 per cent since the start of the year and by 6.4 per cent for a £50,000 fund.

The drop means a saver who had bought an annuity with a £50,000 pot this week, compared with the start of the year, would receive about £200 a year less of income, which translates into thousands of pounds over the course of a typical 25-year retirement.

"This latest drop in annuity rates means that the average standard annuity pension income is now at its lowest ever level," according to Moneyfacts, a price comparison website, which compiled the data.

Annuity rates have been falling for several years because rising longevity means insurers must pay income for longer, and because of a sharp fall in gilt yields that are used to price rates.

However, demand for annuities has also fallen sharply in response to coalition government reforms, which lifted an effective requirement on savers to buy an annuity at retirement. After the reforms were announced in March 2014, sales fell by more than 50 per cent. "The pension freedoms have played havoc with annuity pricing," said Billy Burrows, associate director of Key Retirement, a retirement income advisers.

According to Moneyfacts, "enhanced" annuity rates, or income offered to those in poorer health, have also fallen between 5.3 per cent and 6 per cent since the start of the year. "Enhanced annuity rates are now at their lowest levels since April 2013," said Moneyfacts.

According to industry data, sales of drawdown contracts, where pension funds are kept invested, rather than turned into a secure income, rose 109 per cent in the fourth quarter of 2014, compared to the same period in 2013. Over the same period, annuity sales fell by more than 50 per cent.

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The reforms, which came into force on April 6, were the biggest changes to pensions for nearly a century.

The government estimates the changes will each year give an estimated 320,000 savers with defined contribution pension funds the new option to take their entire fund as cash from age 55.

In the first week of the reforms, pension providers which are members of the Association of British Insurers reported handling more than 200,000 calls from customers, with many wanting to know about the new cash option.

Scottish Widows, part of the taxpayer-backed Lloyds Banking Group, said its initial rush of calls from customers about the freedoms had reduced slightly but it was still receiving about 2,000 inquiries a day.

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