On average UK businesses are predicting that just two-in-five (40%) employees will buy an annuity at retirement, once the Government’s new Defined Contribution (DC) pension changes come into effect.
A survey by Towers Watson shows employers are unsure what retirement options their employees will choose. A third of those surveyed (33%) thought that fewer than a quarter of their employees would buy an annuity, just under a third (29%) thought that between a quarter and half would do so and a third again (33%) predicted that between half and three-quarters would purchase an annuity.
Will Aitken, senior consultant at Towers Watson said: “Clearly a lot of companies are preparing for employees to explore alternative income options once they reach retirement, but the picture is still very mixed from company to company. That uncertainty is to be expected. Someone on course to have a fund of £10,000 may have a very different intention to someone on track for £100,000. Companies need to work out what their employers are anticipating at retirement as a first step towards predicting how, when and with what they will retire.”
Further research of the annuities market reveals that incomes offered to retirees looking to purchase an annuity have started to decline since the budget announcement earlier in the year, particularly for people with smaller DC pension pots.
The best available annuity offered to a 65 year old looking for a single income from a DC pension pot worth £25,000 has declined by 3.3% since the Budget from £1,508 per year in March to £1,458 in August.** However, for larger pension pots the decline has been less significant, with a £50,000 DC pot declining by 1.8% and a £100,000 pot decreasing by 0.8%.
“Given how markets have moved, we would have expected rates to have got slightly worse," said Aitken. "But it’s interesting to see the varied impact the Chancellor’s Budget has had on annuity rates, depending on the size of a person’s pension pot. Someone reaching retirement with a fund of £100,000 is still more than likely to buy a secure annuity income, but someone with £25,000 has a far more difficult decision. If they do opt for an annuity it’s likely to be because they are in good health and are anticipating a relatively long retirement, suggesting their annuity will be paid for longer than average. This would explain the accelerated decline in annuity income for smaller funds.”
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