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Pension from a 100,000 pot 'halved since 1995': Annuities fall to less than 5,000 a year after rates hit record lowReport highlights nightmare facing generation of older workersFall is due to lower interest rates on corporate bonds and gilts and rising life expectancy
An annuity is income paid on monthly basis when pension pot is cashed in
22:41 GMT, 9 January 2013
02:02 GMT, 10 January 2013
The monthly income from a pension pot of 100,000 has halved in the past 18 years, a study has warned
The income from a 100,000 pension pot has more than halved in the past 18 years, a damning study reveals today.
In January 1995, a 65-year-old worker could have bought himself an annuity – an income for life – of 11,380 a year.
Today a man of the same age, who has worked throughout his life to save the same amount, would get an annuity of just 4,920 from an insurance company – a fall of 57 per cent.
Women have also been hit, with their annuity payouts falling from 10,100 in 1995 to 4,920 today, according to the study which demonstrates how annuity rates are plunging to a record low.
When someone cashes in their pension pot, an annuity is the income they are paid on a monthly basis for the rest of their life. Around 450,000 people buy one every year.
But the report from financial information firm Moneyfacts highlights the nightmare facing a generation of older workers who are getting a raw deal despite saving prudently all their lives.
The plunging rates have also created a situation where friends and family members who saved the same amount of money are facing dramatically different retirements.
For example, a 65-year-old man could have retired with a 7,000-a-year annuity in January 2008 but his brother, who is five years younger, will get only 4,920 today.
And the 4,920 annuity from 100,000 only adds up to 98,400 if the retiree died at the age of 85 – a loss of 1,600 on the investment.
Richard Eagling, head of pensions at Moneyfacts, said it must be ‘almost incomprehensible’ to many workers that their chances of enjoying a comfortable old age have been dashed.
He said: ‘Falling annuity rates have shattered the dreams of a comfortable retirement for a whole generation of retirees. With many baby-boomers now hitting retirement, the dramatic fall in annuity rates could not have happened at a worse time.’
The Moneyfacts figures are based on a 65-year-old man with a 100,000 pension pot buying an annuity that does not increase with inflation and does not pass to their spouse when they die.
Lower interest rates on corporate bonds and gilts and rising life expectancy are the reasons behind the fall
Annuity rates have been dropping steadily for years for two reasons: lower interest rates on corporate bonds and gilts, and rising life expectancy.
If a person who retires at 65 lives for another 35 years to celebrate his 100th birthday, it is a lot more expensive for an insurer than if he had died at the age of 80.
Experts also blame the Bank of England’s 375billion money-printing policy, called quantitative easing, for triggering the recent fall in retirement payouts.
A generation of older people may be facing a raw deal despite saving prudently all their lives
It involves the acquisition of gilts, which are government bonds.
As a result of the policy, the price of gilts has gone up but the interest paid out on the gilt, known as the yield, has gone down.
The problem for those retiring this year is annuity rates are largely dictated by gilts, meaning lower gilt yields have triggered lower annuity rates.
Dr Ros Altmann, director general of Saga, said: ‘My concern is that once you have bought an annuity, you are stuck with it for life.
‘People who are buying an annuity today will be permanently poorer as a result of lower annuity rates.
‘I think people need to consider very carefully before purchasing an annuity at the current time because, unless they can be sure they will live for more than 20 years, they won’t get their money back.’
It comes a day after separate research by insurance giant the Prudential found older people who plan to stop work this year will retire with an average of 3,400 less annual income than a pensioner who retired in 2008.