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29 Oct 2014

Rates On Annuities Reducing Pension Pots Further

Retirees who buy annuity today will get, on average, £2,058 less over the duration of their retirement than if they had cashed in their savings before the recently announced pension reforms, This Is Money reports.

Rates on annuities have dropped since the pension changes announced in the Budget, largely thanks to falling yields for gilts - the assets that support annuities - as well as other fixed interest investments and an uncertain market.

As it stands now, the average annuity pays just £3,074 per year, based on a pension pot of £50,000. Comparing this to the equivalent annuity purchased back in March, paying out £3,172, this equates to a £2,058 difference over the course of the average annuity.

Aston Goodey, sales and distribution director at MGM Advantage, stresses that this difference in rate “can make a significant difference in the amount of income over an average retirement.”

Annuities work by providing a guaranteed retirement income in exchange for defined contribution pension savings.

The new pension rules – allowing individuals to access up to £30,000 of pension savings in cash, and removing the requirement to buy annuity – have meant that many people who would have been forced to cash in small pension pots in exchange for annuity can delay that decision and wait to benefit from the new freedoms.

The effect of this has been a collapse in annuity sales; last month, insurance trade body the Association of British Insurers reported that annuity sales were down 32% in the second quarter of 2014 compared to the first, and had dropped 42% from the same period the previous year.

Mr Goodey further advised that: “People looking for a secure income need to shop around, and ensure the company providing the annuity is considering their individual circumstances when calculating the annuity rate. All aspects of a customer´s details are relevant […] from age and occupation, to where they live, as well as their overall health and lifestyle.”

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