Why have UK pension annuity rates fallen, causing lower retirement annuity incomes. Pension annuity rates have dropped back by about 11% in the last year alone. A year ago a benchmark annuity rate would have purchased an annual income of £6,751 when you invested your £100,000 pension fund. Today this would provide an annual income of only £6,000, a drop of £751. The main reason for these recent falls is the government’s policy of getting more money into our ailing economy, known as quantitative easing (QE). Even as I’m writing this I understand there’s another £25bn going into QE, and this can’t be good news for your retirement income.
The Bank of England has previously spent £175bn on buying back gilts issued by our government and consequently the price of these gilts has risen and yields have fallen. The result is that most major annuity providers (insurance companies) cut their UK pension annuity rates in response. These annuity providers do not just buy these gilts, they also invest in bonds issued by larger UK companies, such as banks, once considered a safe haven. Another problem now is that the risk of default on these corporate bonds is increasing so insurance companies are keeping back more cash as reserves and paying out less to people having annuities. They are also investing in better quality bonds (more likely to default) which don’t actually pay such high interest rates as some of the aforementioned lower quality alternatives.