Pensions blow as big firms cut annuity rates
RETIRING workers have been dealt a new pensions blow as a fresh slump in annuity rates wiped thousands of pounds off the income they can expect from their pension.
Several insurers this week announced cuts to the rates they offer on the annuities through which the vast majority people convert their pension fund into an income when they retire.
Two years ago a 65-year-old man with £100,000 could buy a level income of £7,855 a year. Now the same man would get just £6,394, according to new figures from Hargreaves Lansdown, a difference of £1,461 a year. That means the average Scottish 65year-old man retiring now with a £100,000 pension would typically get more than £23,000 less income from his pension overall than if he had retired two years ago (based on life expectancy of 81 for the average 65-year-old man in Scotland).
The income paid by annuities has been hit by a slump in gilt yields, taking them to a ten-year low, as investors opt for security amid continued investment uncertainty. Annuity rates have now dropped by 45 per cent for men and 42 per cent for women since 1995.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said Aegon, Aviva, LV, Legal & General and MGM had all cut their annuity rates in the past few days. “Rates have been trending downwards for two years but in the last month they have fallen off a small cliff,” he said. “They will continue going down in the immediate future, but I would hesitate to say they will do so over the medium term.
“The critical challenge for investors is to make sure they build some long-term durability into their retirement income by protecting themselves against the risk of inflation.”
The decline in annuity rates puts extra onus on retirees to get the buy the best annuity possible at retirement, with a difference of about 20 per cent between the best and worst providers in the income paid out. Retirees can currently use the open market option (OMO) to shop around at retirement rather than take the annuity offered by their existing pension provider.
However, the OMO system is set to be reformed after the government expressed concerns over low levels of shopping around. One possibility is a move towards a system where shopping on the open market for the best annuity is made the default option.
McPhail said there was a growing acceptance at gov- ernment and regulatory level that the OMO system was not working. He pointed to figures showing that people eligible for enhanced annuities, which pay out more income to those who smoke or have impaired health, are significantly more likely to get one if they shop around.
“Even the most recent research by the Association of British Insurers highlights the fact that the vast majority of people eligible for an enhanced annuity don’t go for one if they stay with their existing provider for their annuity,” he said. THE number of internet searches for fixed rate mortgages has rocketed as borrowers seek security before interest rates rise, according to figures published today.
Searches for 10-year fixed rate mortgages increased by 888 per cent in the three months to the end of June, compared with the same period last year, the latest Experian Insight Index shows.
There was also a 602 per cent hike in searches for five-year fixed deals, while searches for tracker deals rose by just 16 per cent as borrowers responded to continued economic uncertainty by looking for cheap longer-term mortgages before interest rates eventually rebound. HOLIDAYMAKERS are returning from trips abroad with an average of almost £30 in leftover foreign currency, research shows.
The unused currency built up by UK travellers will have reached an estimated £902 million by the end of the year, according to a survey by Visa.
It found that almost a quarter of holidaymakers had at least £50 in foreign currency at the end of their holiday, TAXPAYER-BAcKED Lloyds Banking Group received almost 300,000 customer complaints in the first half of the year but rejected nine in ten of them, it said this week.
It closed 715,458 complaints in the first six months of the year, after the end of the test case on unauthorised overdraft charges enabled it to reject thousands of complaints that
Demand for personal loans fell over the same period, with searches down by 14 per cent in the second quarter compared to last year as consumers focused more on paying down debts than adding to them, according to Experian.
Aviva is among the firms to have cut their annuity rates this week