Jeff Salway: Pensions freedoms backfire on savers

A 65-year-old retiring this month would discover that they would have a smaller pension fund than at the same time last year. Picture: Contributed

Retirees using their savings to secure a guaranteed pension income have been hit by a “perfect storm” that has sent annuity rates plunging to new lows.

The average retirement income available through annuities has fallen almost 10 per cent since the so-called pension freedoms took effect last April, according to new figures from Moneyfacts.

Annuity rates have been driven down in recent years by increasing life expectancy and lower gilt yields, but the decline has accelerated in recent months.

The Moneyfacts research shows that someone who paid £100 a month (gross) into an average personal pension fund over 20 years would have built up a pension fund of £45,946 by the time they retired aged 65 in April 2015.

But a 65-year old retiring this month after saving the same amount into the same fund over 20 years would have built up a fund of just £42,470 – £3,476 less.

If those savings were used to buy a standard annuity today, they would buy an average annual retirement income of £1,983, compared with the £2,191 they would have secured 12 months ago.

“A year into the new pension freedoms and the prospects of securing a comfortable retirement income for those making their own private pension provision look bleaker than ever,” said Richard Eagling, head of pensions at Moneyfacts.

“In fact, if anything, the new pension freedoms have proved counter-productive for retirees reluctant to take any risks with their pension pots as annuity providers have struggled to offer competitive pricing given the more limited business volumes at stake.”

The merger of leading annuity providers Just Retirement and Partnership Assurance, which both saw their share prices dive after the pension freedoms were announced in April 2014, has dampened competition even further.

“There is evidence that consolidation in the market, probably prompted by the pension freedoms, has reduced competition and therefore annuity rates,” said Graeme Mitchell, managing director of Galashiels-based Lowland Financial Planning.

“Those firms were generally very competitive for enhanced annuity rates and could be played off against each other to improve payments for our clients.”

Research shows time and again that a guaranteed income, which annuities provide, is the biggest single priority for retirees.

The Financial Conduct Authority (FCA), which is about to launch a consultation on the secondary annuity market, has said that for risk-averse savers with average-sized pensions, annuities usually offer better value – provided they are bought on the open market.

Eight in ten of people who take the annuity offered by their existing provider could get a better deal on the open market, according to a 2014 FCA review. Yet the number of people shopping around for their annuities has fallen since the reforms took effect, compounding the impact of lower annuity rates.

Almost two thirds of people who bought an annuity between July and September last year failed to shop around, FCA figures show. The regulator has also revealed that a similar proportion of people who accessed their pension policies between October and December sacrificed guaranteed annuity rates (which typically offer an income of 10 per cent a year).

Some pension firms are deterring people from shopping around by giving them quick access to their tax-free cash as an incentive to buy an annuity from them, it has been claimed.

But the outlook is improving for savers that want to buy an annuity with some or all of their pension pot, believes Mitchell.

“Interest rates must increase at some time and annuity rates with them, and the dust is settling on pensions freedom,” he said.

He also pointed to recent innovation in the market that is making annuities more attractive, including products with longer minimum terms (of up to 30 years).

“Here you get the best of both worlds – guaranteed income for life and reassurance that you (or your next of kin) will get the original capital back plus some profit,” Mitchell explained.

“There are also short term or temporary annuities for people who need high annual income for a few years before the state pension kicks in.”