Annuities fall into a scary financial bracket. They are something we don't know all that much about and for the vast majority of our lives we don't care about one jot. Then as we come up to retirement they suddenly dictate every aspect of our lives... for the rest of our lives.
So there's horrible news for those approaching retirement, as annuities hit an all-time low.
Crashing ratesIf you have a personal pension or a 'defined contribution' company pension, you spend your working life building up a pension pot. When you retire you give the annuity company your pension pot, and they will pay you a monthly income for the rest of your life.
The sums we are getting back in return for our life savings have dropped spectacularly over the years, and have just reached new lows.
New figures from Alexander Forbes Annuity Bureau show that while four months ago a 60 year old man with a pension pot of £100,000 would have got £6,120 a year in income, now he would get £5,720. This is particularly shocking given that 20 years ago he would have received £14,000 a year. These are among the best rates on the market at the moment - and there are plenty of companies offering far less.
Why?So why are rates dropping, and what we can do about it?
The 'why' is down to two major factors. First, we are living much longer. Let's not forget that this is essentially good news. However, we'll have to live those longer lives on less money as a result. If an annuity company is expecting your retirement to last 30 years rather than 20 years they are bound to pay out less every year or they will lose money.
The second factor is the things the annuity company uses to fund the payout. The bulk of your lump sum will be invested in corporate bonds and government bonds, so the level of payout will depend on what it is expecting to happen to the return on these. With the level of uncertainty in the market at the moment, annuity companies are sticking largely with bonds it considers safe. The demand for these is at record levels, which means they don't pay much interest. As a result, the returns are lower, so the payouts are lower.
So what can you do?There's little you can do to affect overall annuity rates, so you need to think about the rate you are getting.
You will be offered an annuity from your pension company. However, every annuity company calculates longevity differently and invests differently, so you will need to go to the open market and get a range of quotes if you are to be sure of getting the best rate. If that sounds a bit daunting there are experts who will do it for you, so that's no reason to be put off.
You also need to think about your health. All the things that count against you for things like insurance as you go along will suddenly work in your favour when you're buying an annuity. If you smoke, are obese, or have been diagnosed with certain chronic or serious illnesses you could get a third more on your annual payout, so make sure you disclose this to the annuity companies and consider specialist enhanced annuities for those in your position.
For more information, check out this free guide: Your Options at Retirement.