Nov/11 – Why are annuities so low?
This is a question I am often asked, clients are aware that annuity rates are very low but even they are surprised when I have to tell them that their pension fund of £100,000 will only guarantee them a pension of around £5200 pa if they retire today at age 60.
Is that all? Is usually the surprised response.
Well, we are all living longer, a male age 55 today can realistically expect to live till he is age 82. A female could reach age 85.
This means that if you retire at age 60, your fund has to provide you with an annuity for 22 or 25 years. If you think about that it makes more sense that you can only get just over £5000 each year.
Interest rates also make things worse.
The pension provider will invest your money when you give them your pot at your retirement date. Quite correctly, they are expected to make sure your money is safe so they can’t invest it in anything that is risky.
By nature therefore the return on ‘non risk” investments is very low which in turn means that you have to accept a lower annuity.
So, in summary, a combination of low interest rates and higher mortality mean that you will get less for your money when you retire compared with 10 years ago.
There are alternatives such as investment based annuities and Income Drawdown however these are riskier than conventional annuities therefore you will need to seek independent advice.
If you would like to discuss your options at retirement please contact us.