Annuity rates are in free fall, which is bad news for anyone who wants to buy a guaranteed income at retirement.
The average rate has dropped by 18 per cent in the past year, and by 27 per cent over the past five years, according to figures from Retirement Advantage. Or, put another way: someone with a £50,000 pension could have bought an average annual annuity income of £3,270 five years ago, £2,895 a year ago, and just £2,375 today, suggesting that 2016 will be the worst ever year for annuity rates.
Rates are also unlikely to pick up any time soon, what with the economic uncertainty around Brexit and our longer life expectancy. A man aged 65 can expect to live a further 21 years, until the age of 86. Life expectancy is longer for a woman, at 24 years, taking her to the ripe old age of 89. Remember, these are just averages. You have a one in four chance of living until you are 94 if you are a man and a one in four chance of celebrating your 96th birthday if you are a woman.
Of course, you don’t have to buy an annuity when you retire. The rules changed in April 2015, giving people greater freedom and the option to take the whole of their pension fund as a cash lump sum. But annuities pay a regular income until you die and are the right choice for many people, particularly people who are more interested in financial security than the latest Ferrari.
But not all annuities are the same – and millions of people are missing out on higher rates because they don’t choose the right one. Take enhanced, or impaired life, annuities. They are often overlooked but they can boost your retirement income by about 30 per cent because the rate they pay is determined partly by your health and lifestyle. To put it bluntly, if you are in poor health you are unlikely to live out a long retirement so the annuity will not have to pay out for as long. The company can therefore offer a higher rate.
You don’t even have to be at death’s door to qualify for an enhanced annuity rate. In fact, experts estimate that about 60 per cent of the UK population could be eligible for an enhanced annuity at retirement. So, if you enjoy a drink, or you are carrying a few extra kilos, you could secure a higher retirement income than the teetotal gym bunny next door. Hurrah!
For example, a smoker with a £50,000 pension who is slightly overweight with high cholesterol could expect a retirement income of £2,725 with an enhanced annuity, compared with £2,224 for a standard annuity. In other words, poor physical health is actually good for you – at least financially.
If you are wondering why enhanced annuities aren’t flying off the shelves, it’s probably got something to do with our collective failure to shop around for the best deal. About two thirds of people buy their annuity from their pension company, which is a bit like marrying your first girlfriend or boyfriend. Sometimes it works, but often it doesn’t.
So let’s resolve to get off our backsides and see what’s out there. And if our backsides are fat, so much the better.
Naomi Caine is a freelance journalist and former Money Editor of The Sunday Times