Annuity rates are sinking without trace despite more retirement savers opting to turn their pensions into a guaranteed income for life.
Since April 2015, the income from an annuity has dropped by 10%, according to research from independent financial firm Moneyfacts.
Figures from the firm’s Personal Pension and Annuity Trends Treasury Report show that returns from the investments are at the lowest ever.
The report looks at the size of pension funds and returns on annuities and compares them with those of a year ago.
The research found that someone paying £100 a month into a pension over 20 years would retire with a pension of £42,470 if they retired now aged 65 years old.
Pension and annuity returns fall
A year ago, the same fund would have been worth 7.5% more at £45,946.
Converting that fund into an annuity would provide a guaranteed retirement income of £1, 983 a year – down 9.4% from £2,191 if the saver had retired 12 months ago.
Analysis by the firm shows pension investments and annuity rates have all dropped over the past year.
Pension funds are returning around 2.3% less, while standard annuities are down 5.7% and enhanced annuities show a reduced return of 6.3%.
Richard Eagling, head of pensions at Moneyfacts, explained that the fall in pension and annuity returns coincides with the introduction of flexible access pensions.
Lack of choice for retirement
“Pension freedoms were designed to make retirement spending easier for people, and although thousands have exercised their new rights to withdraw and spend their pension funds as they wish, they do so against a background of having to cope with generating a reduced income,” he said.
Eagling also argues that as more retirement savers switch from workplace final salary schemes to pensions that rely on stock market performance, providing a decent retirement income will become harder.
“Annuities remain the only way of guaranteeing an income and with rates at an all-time low, the returns are not spectacular,” he said.
“Any other option offered by pension freedoms increases the risk that retirement saves will run out of money once they have given work.
“Falling annuity rates make the job of shopping around for the best deals even harder.”