Low annuity rates 'must prompt pensions rethink'

Pension files Annuity levels have been low for some time owing to the economic situation

Rates for retirement incomes are unlikely to rise soon, a report says.

A typical retiree now will get £10,000 less in total retirement income than would have been the case with the same pension savings in 2011, the report for MGM Advantage and Prudential says.

Its authors say people should consider less conventional forms of annuity, which turn an individual's pension savings into annual retirement income.

But this came with a warning that they need to be aware of the risks involved.

Shopping around

Nearly 400,000 annuities were sold to retirees last year, bought for an average of £28,000 from their pension pot.

There has been criticism of the industry for not explaining to retirees that they can buy their annuity from any provider that they choose. This has led to the introduction of a new code of conduct ensuring that pension companies tell their clients that they can shop around.

Pension schemes explained

  • Final-salary scheme: Guaranteed pension based on earnings at end of your career and length of service. Also known as defined benefit schemes
  • Career average scheme: Guaranteed pension based on your average pay over your career
  • Defined contribution scheme: Determined by contributions and investment returns. Usually worth less than final-salary pensions

But now, a report for MGM Advantage and Prudential has suggested that people should shop around for the type of annuity that suits them, not just the provider.

'Risks involved'

Authors Billy Burrows, an annuity expert, and academic Professor John Maule say that annuities linked to investments might be a better choice for people with a larger pension pot.

Typically, people buy a guaranteed pension income at the point of retirement, but in an investment-linked product this income might go up or down depending on the success of the investments during the individual's retirement years.

"Alternative options such as investment-linked annuities can produce better outcomes for many pensioners by combining the peace of mind of an income for life with the potential for future income growth and flexibility," the report said.

"However these policies are not without risk, and it is important that investors fully understand all the risks associated with these options."

Mr Burrows said that anyone considering an alternative product needed to be very engaged in the process and get sensible advice from the industry.

He described annuity rates as being at a "tipping point".

Recent figures from MGM Advantage showed a 3% increase in rates in the first three months of 2013. However, this was set against a backdrop of falling rates for some time.

In March, somebody with a typical £50,000 pension pot, aged 65, could secure an annual pension income of £2,875. Two years earlier, they could get £3,443, which equated to a difference of more than £10,000 over an average 18 years of retirement.

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