Pension Income Record Increase

Pension income increased for the first time since 2007 last year as annuity rates jumped 10% despite a low interest rate environment

Emma Wall 13 January, 2014 | 5:27PM
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Good news for workers approaching retirement - annuity rates which secure your pension income increased for the first time in six years in 2013. 

After falling to an all-time low in March 2013, annuity rates rose 10% over the course of the year thanks to rising Gilt yields and increased competition in the annuity market. 

A report by Investment Life and Pensions Moneyfacts revealed that a standard level without guarantee annuity for a 65 year old rose by 9.1% based on a £10K purchase price and by 10.5% based on a £50K purchase price during 2013. This was the largest increase since the report began in 1994.

But despite this increase, pension savers are being warned that a large gulf still exists between the best and worst annuities available on the market. 

Too many workers are failing to exercise their open-market option when purchasing an annuity. Pensioners who do not exercise their open market option and shop around for an annuity before fixing the rate at which they will receive retirement income could be penalised by 31%, according to figures from the Association of British Insurers (ABI) in August.

Richard Eagling, Head of Pensions at Moneyfacts said: “When it comes to the annuity market it has become customary in recent times to report another disappointing year of falling annuity rates. However, 2013 proved to be an excellent year for annuity income with rates halting their historical decline and actually increasing. Given the extreme difficulties of securing a comfortable retirement income this increase in annuity rates is welcome news for retirees.”

The Financial Conduct Authority (FCA) is currently undertaking a thematic review into annuity pricing, which will hopefully reveal the true extent of consumer detriment in the annuity market.

It is hoped the results, due in the next month, will reveal how many people are actually buying annuities that are significantly worse than the best on the market.

Tom McPhail, head of Pensions Research for Hargreaves Lansdown said that the report would have a positive effect on the annuity market.

"With a bit of luck we'll see the FCA, Treasury and DWP finally get to grips with reforming the retirement shopping around process this year," he said. "A rise in interest rates could bring some relief for final salary schemes, as it would reduce their liabilities, as well as pushing up annuity rates – or maybe we'll just lurch back into recession."

A report by the the Financial Services Consumer Panel (FSCP) in December revealed that a lack of regulation in the annuity industry was negatively impacting the consumer, and the current commission based model had to change.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar