Annuity income now 16.2% lower

Annuity rates have been falling since reaching a recent high in June 2014. For our benchmark example 65 year old with a fund of £100,000 buying a single life, level annuity the income was £6,143 pa and has reduced by £565 pa or 9.2% to £5,578 pa in the last eighteen months.

Annuities are based mainly on the 15-year gilt yields and these have reduced 114 basis points from 3.14% in June 2014 to 2.00% in January 2015. As a general rule a change of this amount would result in annuity rates reducing by 11.4% suggesting rates could reduce further.

Most people remain invested in equities before taking their benefits and for those that track the FTSE-100 index the fall in their fund would significantly reduce their income in retirement.

Fig 1: Chart comparing annuity rates and FTSE-100 index

The above chart shows since December 2014 the FTSE-100 index has reduced by 13.59% and annuity rates for our benchmark example is lower by 3.08%. The combination of both these falls can make a significant reduction in the lifetime income to someone retiring today.

Using our benchmark example, for someone with a fund of £100,000 in December 2014 could receive an income of £5,755 pa. By delaying buying an annuity and remaining invested their fund would have reduced to £86,410.

A lower annuity rate of 5.578% would apply today and mean they would receive £935 pa less income or only £4,820 pa. This is a fall in the annuity income of 16.2% for their lifetime.

In terms of lifetime income, the Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £16,175 less over his lifetime. For a female she can expected to live for 20.4 years increasing her income by £19,074.

Wait for markets to recover

For people caught by the sudden fall in markets they could wait for a recovery in the equity markets. If you need to take your tax free lump sum now, it is possible to transfer to Flexi-access drawdown allowing access to funds while leaving your fund invested.

You are allowed to take a 25% tax free lump sum or to take parts of this over time leaving the remaining fund in equities and time to recover.

To reduce volatility a smoothed growth fund would allow the fund to continue growing at 5-6% each year while reducing volatility. Growth in the fund is based on long term expectations so short term falls in equities are balanced with periods of above average gains producing a smoothed return over time.