12 June 2006
Healthy pensioners retiring today are nearly four per cent worse
off than their counterparts who stopped work a year ago as
conventional annuity rates continue to decline, according to the
first Prudential Annuities Index.
Aston Goodey, Head of Retirement for Prudential UK, said:
"Pensioners retiring today are receiving lower incomes than those
retiring a year ago mainly because the continuing decline in gilt
and bond market yields has reduced conventional annuity rates
across the market.
"We are looking at all options to increase the value of
annuities we pay to our customers, and the increasingly attractive
with-profits annuity is finding favour with both advisers and their
customers."
Prudential has seen the take-up of with-profits annuities rise
dramatically in the last year, with sales doubling in the year to
March 2006. Conventional annuity payments are backed by
fixed-interest investments and, according to Prudential, are at
their lowest for more than 30 years. With-profits annuities link
the level of income to the performance of, in the case of
Prudential customers, the Prudential with-profits fund, which has a
mix of assets that over the longer term gives them the prospect of
income growth. The returns from these investments are paid to
annuitants as bonuses, which may vary from year-to-year. Bonuses
are designed to smooth the ups and downs of the investment
markets.
Prudential analysis reveals that clients opting for three and
five per cent Anticipated Bonus Rates (ABR) on with-profit
annuities now receive a higher starting income on retirement than
those choosing traditional annuities. According to Prudential, a
65-year-old man buying a £100,000 conventional annuity today
can expect an average annual income of £6,540 compared with
£6,730 a year ago - a drop of £190 or 2.8 per cent. A
60-year-old woman can expect an average £5,330 compared with
£5,550 in 2005 reducing her income by 3.9 per cent or
£220.
However taking a £100,000 with-profit annuity with a three
per cent Anticipated Bonus Rate (ABR) will pay £6,981 for a
65-year-old man in year one, while a five per cent ABR will pay
£8,406 in the first year.
Aston Goodey continued: "It is important that people approaching
retirement understand the changes in the market. Our analysis
reveals that today's pensioners are slightly worse off compared to
colleagues or friends who have retired slightly earlier.
"With-profit annuities are now offering significantly higher
starting incomes. However they do not suit everyone as there is a
risk involved and the income can fall. Those who want a guaranteed
income should still look to conventional annuities."
The Prudential Annuity Index also shows the wide range of
annuity rates with the difference between the best and the worst
being as much as £1,430 a year in some cases, emphasising the
importance of exercising the open market option for pensioners
taking an annuity.
