Gender equality rules, UK monetary policy and euro crisis blamed as new retirees suffer sharpest decline in pension income since 1998
Retirement incomes for new pensioners have plunged by up to 11.5% – their biggest fall in more than a decade.
In 2012, income generated by a standard annuity for a 65-year-old male fell by 11.5%, the sharpest drop since 1998 – when annuity income fell an average 13.7%. For a 65-year-old male buying an annuity with a £50,000 pension pot this equates to a decline in annual income of £274 now compared to a year ago.
The equivalent annuity income for a female of the same age fell by just over 6% last year, according to research by data crunchers Investment Life & Pensions Moneyfacts.
Most retirees with pension funds use the money to buy an annuity, an insurance contract that pays them an income for the rest of their life. However, the euro crisis, UK monetary policy and rules on gender equality all taking their toll.
“Sadly, 2012 has proved to be another poor year for annuity rates,” said Richard Eagling, head of pensions at Moneyfacts.
“Record low gilt yields sparked by further quantitative easing and uncertainty over the eurozone, combined with the switch to gender neutral pricing, led to a high volume of repricing among annuity providers throughout 2012.”
Gender neutral pricing came in on 21 December 2012, following a European court of justice ruling that insurance companies can no longer vary premiums according to the policyholder’s sex. This has affected motor and life insurance rates as well as annuities.
The move to unisex rates alone is responsible for wiping off £74 from the typical annual pension income of a 65-year-old male with a £50,000 pension pot. Conversely, for a female in the same position it has increased income by almost the same.
Gender neutral pricing has played only a small part in the decline in annuity rates, which have halved since 1994, when Monyefacts first started keeping records.
Separate research by Prudential shows that new retirees in 2013 will have a rough ride. A survey from the insurer of almost 9,000 non-retired adults aged over 45, including 1,000 who intend to retire in 2013, showed the average expected retirement income was £15,300 a year. This is £200 lower than the average expected in 2012 and £3,400 less than in 2008.
Pensioner income could suffer further damage following an announcement about the future of the retail prices index (RPI) by the Office for National Statistics on Thursday. The National Statistician, Jil Matheson, will announce whether she is recommending RPI be brought more in line with the consumer prices index (CPI).
The RPI normally runs higher than the CPI and, as many annuities are linked to RPI, a change could have a detrimental affect on retirement income.
According to financial advice firm Hargreaves Lansdown, the best RPI-linked annuity on the market on 3 January paid £3,663 a year to a 65-year-old (based on a £100,000 pot, five-year guaranteed annuity). If the anticipated changes to RPI are made, over the full 20 years the recipient would be £9,500 worse off.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “This kind of change can prove to be the most damaging of stealth attacks on pensioner incomes; it appears innocuous but over an entire retirement it can slowly deprive pensioners of thousands of pounds.”