Annuity rates set to dip 10% as rates fall

Published on Friday 7 November 2008 19:28

ANNUITY rates could tumble by up to 10 per cent over the next year following the Bank of England base rate cut to 3 per cent.

Interest rates affect annuities because they dictate bond rates, on which annuity levels are based. As bond yields fall, annuities will too, dragging them down from their current six-year high.

A drop of 10 per cent would leave a 65-year old man with a 100,000 pension pot 15,000 worse off in retirement, said Nigel Callaghan, pensions analyst at IFA Hargreaves Lansdown.

"Annuities can only defy gravity for so long. With most indicators pointing to dramatic annuity rate falls, many investors are deciding to lock into today's rates."

Most people use their pension pot to buy an annuity on retirement and as rates fall retirees are advised to shop around for the best available deal. But most retirees fail to use the open market option, which allows them to buy the best-priced annuity on the market, while those in ill health or who smoke could improve their retirement income by up to 40 per cent by taking out an impaired or enhanced annuity.