Eurozone uncertainty and record low gilt yields send annuity incomes into biggest plunge since 1998

PEOPLE retiring last year were hit by the biggest plunge since 1998 in the average income they could buy with an annuity, as rates were driven down by the effects of quantitative easing (QE).

The typical income available from an annuity has now fallen in 15 of the last 18 years, according to Investment, Life and Pensions Moneyfacts.

It revealed that average annual income that a 65-year old male retiring in 2012 could secure with a standard annuity fell by 11.5 per cent in 2012. It was the biggest annual fall since 1998, which saw a 13.7 per cent drop.

The income from a £100,000 pension pot has more than halved since January 1995. Then, a 65-year-old male could get an annual income of £11,380 from a standard annuity. His average 2012 counterpart could buy an income of just £4,920.

The income that female retirees could buy with an annuity fell by 6.1 per cent last year. The fall was less severe, thanks to new rules that came into force last month banning insurers from using someone’s gender as a factor when pricing their annuity. Females have traditionally been offered lower annuity rates due to their longer life expectancy, but insurers can no longer take such gender differences into consideration.

Richard Eagling, head of pensions at Moneyfacts, said: “Record low gilt yields sparked by further QE and uncertainty over the eurozone combined with the switch to gender neutral pricing led to a high volume of repricing amongst annuity providers throughout 2012. The result of this activity has been a fifth consecutive year in which average annuity income has fallen.”

Average annual retirement income has dropped more than 16 per cent in the last five years, another study out this week has revealed. A fifth of people retiring this year expect to live on an average total income of £15,500 a year, according to research by Prudential, the lowest in five years. The insurer found that a fifth of people believe they’ll have income of less than £10,000 a year in retirement, including private, company and state pensions.

It revealed that the amount retirees anticipate differs depending on where they live. The average expected annual income in Scotland is £14,200, compared with the average of £15,500 and £17,900 in London.

Only in the West Midlands, Yorkshire and Humberside do retirees have lower pension expectations than those in Scotland.

Vince Smith-Hughes, Prudential’s retirement income expert, said: “The current economic climate has created the perfect storm for people in the run-up to retirement. The impact of the credit crunch, banking crisis, recession, and concerns over the Eurozone has been reflected in the fact that expected retirement income levels have hit a five-year-low.

JEFF SALWAY