Pensions plummet as annuity returns fall

Published on Friday 4 December 2009 20:48

WORKERS reaching retirement are getting pension incomes half the level of their counterparts 15 years ago, after annuity rates plummeted to a new low.

The returns paid on annuities, which are used to convert pension funds into a retirement income, have fallen 45.4 per cent since 1994, according to Investment, Life and Pensions Moneyfacts. It found that a 65-year old man using a 10,000 pension fund to buy a level annuity would now get just 625 a year, down from 1,145 a year in 1994.

Richard Eagling, editor of Investment, Life & Pensions Moneyfacts, commented: "With few signs that the recent spate of annuity price reductions is at an end, the priority must be to maximise the amount of retirement income received. For most consumers, this will only be achieved by shopping around to obtain the best price for their annuity and exploring the open market option."

But pensioners are losing out on an average of 169 a year by failing to shop around for an annuity when they retire, according to figures published yesterday by the Pensions Income Choice Association, which said that failings in the annuitisation process would cost retirees in the UK 13.9 million in pension income next year alone.

Under the open market option (OMO), retirees can buy from any provider, rather than take an annuity from their existing pension provider. But only 34 per cent of annuitants have taken advantage of the OMO this year, down from 39 per cent two years ago, according to the Association of British Insurers. While retirees with the most competitive providers can get the best rates without moving elsewhere, some pensioners are missing out on an estimated 20 per cent of income by failing to shop around.

And those not using the OMO are less likely to buy enhanced annuities, which pay out more to those with reduced life expectancy. Just 0.5 per cent of retirees who bought an annuity from their existing pension provider opted for an enhanced annuity, the ABI said. In contrast, 24 per cent who exercised the OMO bought an enhanced annuity.