A new study by My Pension Expert has revealed a 5.019% drop in the top enhanced annuity rate during the last twelve months. The research focused on a 64 year-old with a pension pot of £100,000 that qualified for an enhanced rate as result of smoking ten cigarettes daily, consuming 52 units of alcohol weekly and possessing high blood pressure.
On the 24th September 2013 they would have been able to receive a top rate of £7332, compared to 30th of September 2014 when the best rate available is now £6964. That’s a £368 drop in the amount the retiree could receive a year. When factoring in an average 20 year retirement this amount becomes £7,360 which could make a massive difference to a person’s standard of living.
So what could have caused the decrease in the rate? It would seem that there are two major factors behind decline. The first thing to consider is the significant reduction in the 15-year gilt yields, which have a considerable influence on annuity rates. Having recently dropped to a fourteen month low of 2.83%, yields have been on the slide since the turn of the year and as a result annuity rates have fallen with them.
The second factor to consider is the impact of the pension revolution that was revealed in the March Budget. There has been a reduction in the demand for annuities since it was announced that retirees will be granted greater freedom over how they can use their pension pots. This fall in the amount of annuities sold has led to providers decreasing their rates in an attempt to cut their losses.
The changes outlined in the Budget have particularly seen demand for enhanced annuities drop for those who are in poor health. Many have decided to refrain from buying an annuity which they may not live long enough to see a return from and are instead exploring other avenues that the freedoms have opened up. This would explain why there is only a marginal 0.292% difference between the top standard annuity on the 24th of September 2013 and the 30th of September 2014, compared to the enhanced drop.
Scott Mullen director at My Pension Expert, said:
“A fall in enhanced annuity rates is to be expected given the factors that are in play at the moment. Rates are more volatile than ever as the current market remains on shifting sands until the new pension freedoms are introduced next April.
“These are testing times for those approaching retirement and taking advice when evaluating your options is essential. It’s one of the important financial decisions a person will make in their lifetime and the right advice can make a massive difference when negotiating the pension minefield towards a happy retirement.”
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