Annuities hit with significant falls

Annuities are lower across the board with the largest reduction for 100% joint life rates aged 55 with 3.2% where Hodge Life have dominated over the competition with large margins. The following table shows examples of the changes.

For older annuitants the changes were not as great at 1.6% fall for a single life and 1.8% for 50% joint life for those aged 75. Our benchmark example below compares the change in yields with annuities over the past seven months.

For our benchmark example of a person with £100,000 buying an annuity on a single life, level basis has seen income reduce by £146 pa. In terms of lifetime income, the Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £2,525 more over his lifetime. For a female she can expected to live for 20.4 years increasing her income by £2,976.

Annuities can rise with interest rates

Although annuity rates are falling now, an increase in interest rates will mean annuities will increase as well. In general a 1% rise in interest rates would see annuities higher by 10%.

The Bank of England is unlikely to increase interest rates this year as they have admitted there is not enough evidence the economy is strong enough to support a rise. Falling unemployment and record employment with weak wage growth as well as spare capacity in the economy at 1% of GDP is preventing the Bank from making any changes. Interest rates have remained at 0.5% since 2009 and may remain at this level until spring 2015.

Ideally people should wait for higher interest rates, however, this may take more than a year to see significant benefits in terms of annuity rates. It may not be possible for people to wait a year or more for income.

It is possible to take your tax free lump using a fixed term annuity for one year or more allowing time for interest rates to improve. This route would provide an income selected by you and a guaranteed maturity amount at the end of the term.

An alternative would be pension drawdown now available even for smaller funds of £30,000 to £100,000 and this option would allow greater income flexibility than the fixed term plan.