Skip Navigation LinksHome > News > 2012 > August 2012 > Is it now time to ditch annuities?

Is it now time to ditch annuities?

Hidden away under the euphoria of the Olympics is the sobering fact that the latest figures on annuity rates make for grim reading.

Annuity rates continue to tumble and have now reached an all-time low. For a pension pot of £100,000 a level annuity for a man aged 65 is now little more than £5,600 a year, a third or more lower than it might have been as little as five years ago.

Commenting on the latest figures Malcolm McLean, consultant with Barnett Waddingham, the UK’s leading provider of actuarial and consultancy services, said:

“Annuity rates have been in decline for over twenty years, largely as a result of increasing life expectancies, but the credit crunch and subsequent recession have accelerated this trend by causing falls in interest rates and yields from government gilts.

“I cannot see that this trend is likely to reverse any time soon and in fact it looks like low annuity rates are here to stay.

“With such unattractive rates, many people approaching retirement at the moment are reluctant to lock themselves into a fixed rate annuity and are opting for riskier income drawdown plans instead.

“Even more worrying is the reaction of others of the younger generation who are rejecting pensions as a sensible long term investment on the basis of such poor and declining returns. Currently for a 65 year old man the annuity he would be offered from a pension pot of £100,000 is little more than £5,600 a year. You do not have to be a pensions expert to work out that it would take nearly 18 years before his capital investment is returned in full, a time period which for someone of his age is not that far short of his average life expectancy anyway.

“In my view, we are now at or very close to a tipping point and should not be afraid to contemplate more radical solutions to what is becoming a major and persisting problem.

“Is it time to ditch the requirement to purchase an annuity altogether and leave it to individuals to decide how best to use the money they have accumulated in their pension pot?

“The inability to access the money under a minimum age, currently 55, would have to remain but under this arrangement could perhaps be increased to 60 or even restricted to those who have reached state pension age. Under the plans for a bigger state pension, most pensioners in the future are likely to have an income from their state pension on its own, sufficient to avoid their having to resort to claiming state funded means tested benefits, regardless of how they choose to spend their private pension capital. This is something the government may see as paramount given the fact that tax relief will have been given on the build-up of the pension pot and they would presumably not wish to see that duplicated by extra state provision in lieu.

“Other variations on this theme may be possible but under any scenario I do not see how the present annuity arrangements can simply continue unchanged given current attitudes to pension saving and the growing savings gap.”

For more information please contact Malcolm McLean or Steph Gold.

Share this


We would like to use cookies on this website to help us provide the best user experience. By browsing this site you agree to their use.

More info | Close