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30 June 2012 last updated
Annuity Rates and Pensioner Income Now 43% Lower

The timing of an annuity rates purchase can make a significant difference to the amount income a pensioner receives over their lifetime compared to other times and it could mean over 40% less income for people buying an annuity today.

Annuity rates
have been decreasing for many years now and this has directly reduced the buying power of a pensioner’s pension fund. In addition many pensioners remain invested in equities right up to the time they purchase annuities at retirement and over this same period equities have also decreased.

As an example, if a male annuitant was aged 65 four years ago in 2007 with a fund of £100,000 he could have purchased an annuity providing an income of £7,500 pa or a rate of 7.5% for his lifetime benefiting from relatively high annuity rates and equities at that time. He could expect to live 17.6 years and over his lifetime and receive an amount of £132,000 before tax from this annuity.

 
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Delaying annuity rates purchase can be a high cost

Many people do decided to delay taking their retirement benefits, not purchasing a pension annuity and continued working for a period of time. In our example, if he delayed taking benefits for another four years this decision would have reduced the income he could have received over his lifetime by an incredible 42.8%. The reason for this is due to timing and the combination of both equities and annuity rates decreasing at the same time.

Four years later in 2011 at age 69 this male annuitant would have found that equities had reduced his pension fund from £100,000 down to £77,100. Although annuity rates increase with age, due to the severe decreases the best annuity rates will only pay a 69 year old a rate of 6.7%, even less than a 65 year old four years earlier, which means the income from the smaller fund size will be £5,165 pa.

In addition as he is now four years older his life expectancy has reduced. Based on the national average at age 65 he could look forward to living for 17.6 years, however, now at age 69 this has reduced to 14.6 years so he has less time to enjoy less income.

The income he could expect to receive over his lifetime has now reduced to £75,409, a reduction of £56,591 due to his decision to delay purchasing an annuity for four years.

In order to recover this lost lifetime income he could have invested more into his pension fund. In order to do this he must achieve a higher income level for the remaining 14.6 years and this would be approximately £9,041 pa. To achieve this he would need a fund of £134,941 or to invest a further £59,532 into his pension fund.

Annuity rates income lower for 60 year olds

For a male aged 60 four years ago in 2007 with a fund of £100,000 he could have purchased an annuity with an income of £6,700 pa or annuity rates of 6.7% for his lifetime. He could expect to live 21.5 years and over his lifetime receive an amount of £144,050 before tax from this annuity.

Four years later in 2011 at age 64, equities had reduced his pension fund from £100,000 down to £77,100 and although annuity rates increased with his age the latest annuity rates for a 64 year old is 5.9% which means the income from the smaller fund size will be £4,548 pa.

As he is now four years older his life expectancy has reduced to 18.3 and the total income he could expect to receive over his lifetime has now reduced to £83,228, a reduction of £60,822 due to the cost of delay and reduced equities and annuity rates. This is 42.2% less income he could expect for his lifetime than four year ago.

To recover the lost lifetime income if he invested more into his pension fund the higher income level required would be £7,871 pa for 18.3 years to match the total lifetime income had he taken annuity rates at age 60. To achieve this he would need a fund of £133,406 or to invest a further £50,178 into his pension fund.

The timing of an annuity purchase and the level of equities as well as annuity rates can make a significant difference to a pensioner income over their lifetime as well as the quality of life, whether or not they continue working.

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