This year has already provided some much-needed glimmers of financial hope for people approaching retirement.
Tales of disappointing retirement incomes have become depressingly familiar in recent years, but experts say the situation could finally be looking up.
Financial information website Moneyfacts has found that annuity rates, which set the size of your income for the rest of your life after you finish working, saw a record year of growth in 2013.
When people retire, they use the money they have accumulated in their pension pot to buy an annuity. Annuity rates are set by insurance companies, and buying one is a long-term investment decision. There are several different types of annuity - some will also provide an income for loved ones after your death and others take ill-health into account.
Whichever one you choose though, the rate you end up with will decide how much money you have for the rest of your life, so it’s essential to pick carefully.
Moneyfacts said that after falling to a new low in March 2013, annuity rates then rallied strongly for the remainder of the year.
Significantly, 2013 marks the first calendar year since 2007 in which annuity income has increased, putting an end to five years of falling rates. Until last year annuity rates had been in general decline for some time, in part because people are living longer.
Pensions experts also blame the fall as a side-effect of the Bank of England’s efforts to kick-start the economy in the form of quantitative easing (QE). Moneyfacts, though, says the absence of any recent rounds of QE, plus signs that annuity providers are becoming more competitive, are having a positive impact on the rates on offer for new retirees.
Another factor which has affected annuity pricing is new European “gender neutral” rules which came into place in December 2012. They mean that insurers are no longer allowed to take someone’s sex into account when deciding what annuity rate they should get. Before this time, men tended to be offered better rates on the basis that they often have a shorter lifespan than women.
Moneyfacts says that in the first few months after the change, insurers became more conservative about their pricing of annuities due to uncertainty over the exact impact the new rules would have. But now providers have had time to get used to these changes, they have been busy increasing their rates.
Signs of increasing optimism are already filtering through to people retiring this year. More research - from insurer Prudential’s annual study, which tracks retirees’ aspirations across the UK - found people retiring in 2014 expect an average income of £15,800 a year, which is £500 more than those retiring in 2013, and £300 more than those who did so in 2012.
But before we all get too carried away, the Prudential research warns expected retirement incomes are still much lower than they were for people ending their working life in 2008, when the typical sum expected was £18,700 - and this is before the eroding impact inflation has on incomes is also taken into account.
The Moneyfacts research also says that despite the recent increase, annuity rates are still “subdued” on a historic basis.
Meanwhile, there’s been additional controversy about the way we buy annuities. Pensions Minister Steve Webb outlined plans which would enable retired workers to shop around for new pension schemes, in the same way they can change their mortgage under new plans to tackle “murky” practices. So one thing is for sure: if you’re approaching retirement, it’s absolutely vital to shop around before you buy an annuity and get the best deal for your circumstances. Richard Eagling, head of pensions at Moneyfacts, says: “Despite the good news that annuity rates increased across the board in 2013, it is important that this does not lull retirees into a false sense of security when it comes to choosing their annuity provider. Wide variations in pricing still remain, making it essential that individuals shop around for the best deal and flag up any health problems or lifestyle considerations that could boost their retirement income further.”
Annuity Rates: Facts
An annuity converts your pension into a guaranteed regular income for your lifetime.
The income you get from an annuity is sometimes called the annuity rate.
Rates can vary between providers, and you can choose the provider of your annuity.
There are many decisions to make at retirement and a range of retirement income products are available. ble.
For more information visit the website www.abi.org.uk/annuities.