Annuity rates continue to decline

By Paul Lewis BBC Radio 4's Money Box

People who save up for their own retirement through a personal or stakeholder pension are getting less for their money.

When they retire, their pension fund is converted into an income by buying an annuity - an income for life - from an insurance company.

But research by MoneyFacts has shown that the annuity you buy today will be 3% lower than it would have been in December.

And that was 10% less than a year before.

As a result, a man of 65 retiring now with a pension fund of £100,000, who went to the best annuity provider, would get £7,336 a year.

The main reason rates are falling is because people are living longer

Julie Stark, ABI

A woman of the same age however, would only get £6,786 a year, as she is expected to live longer.

Those incomes are paid for life at the same level.

To protect against inflation costs even more.

For £100,000, a man would get £5,364 inflation-proofed for life, and a woman just £4,754.

Not much more than the state pension.

And the average pension pot is not £100,000 but more like £30,000.

Increased longevity

One reason for the decline in annuities is growing life expectancy.

The Association of British Insurers recently said that in 1928 a man aged 65 could expect to live 11.5 years.

That figure is currently 16 years, and by 2050 it will be 19 years.

And this has a dramatic effect, as Policy Adviser Julie Stark told the programme:

From December 2001 we have got over 20% falls in annuities

Stuart Bayliss, Annuity Direct

"The main reason that annuity rates are falling is because people are living longer, which is a good thing overall, but it does have an effect on annuity rates.

"You have built up your pension pot, you have got a finite amount of money, and that has to be spread over a greater number of years.

"It could get worse in the future because it is likely that people will continue to live longer.

"But remember, an annuity lasts for your whole lifetime. It is paid however long you live."

Stuart Bayliss of Independent Financial Advisers Annuity Direct said the position could be even worse than the new figures indicated:

"From December 2001 we have got over 20% falls in annuities and that seems to be continuing, though it is falling off a bit.

"Longevity is only part of it. It is because the insurers are writing a guarantee for 25 years, and if you price something, that includes 25 years of medical research into the future.

"It is small wonder they are charging for this because they have got them wrong in the past."

Shop around

If you are approaching retirement, the most important thing is to squeeze every penny out of your pension fund.

First, find the best annuity. The difference between the best and the average is 15% for men and 17% for women.

You must also decide if you want it to go up with inflation or be the same amount each year.

The more you save, the larger annuity you can buy

ABI Policy Advisor Julie Stark

If you are married, do you want the annuity to carry on being paid to the surviving spouse?

And remember that people who have a medical condition can often get a higher "impaired life" annuity.

However, if you are still a way off retirement then the only solutions may be to save more or work longer. If you can.

But Julie Stark warns:

"Not everyone has that choice. Saving more money is another option, the more you save, the larger annuity you can buy.

"And employers are crucial. If they make a contribution to a pension scheme employees are much more likely to save themselves."

BBC Radio 4's Money Box was broadcast at 1204 BST on Saturday, 31 May, 2003.