Annuity-rate collapse forces savers to rethink plans
PENSION savers have been urged to consider alternatives to buying a lifetime annuity with their retirement funds after new figures showed rates have suffered a huge fall.
The collapse in annuity rates means the annual pension income a 65-year-old would get for €100,000 has dropped from €6,000 to just €5,400 a year.
This means a pensioner who buys an annuity today would be almost €700 worse off a year than if they bought the annuity earlier this year, the Irish Independent has learned.
Annuities are a product you buy from an insurance company. You hand over your pension fund and get a fixed sum of money paid each month, typically for the rest of your life.
Insurance companies providing an annuity take the money they get and invest it in bonds to give them a return to match what they have to pay out over the life expectancy of the person buying the annuity.
Annuities tend to be backed by investment in "safe" bonds, typically German and French bonds. But the returns on these bonds are at record lows.
Yields on German and French bonds have fallen as investors buy them up as a safe haven amid the eurozone debt crisis. The greater the demand for a bond, the lower the yield or interest rate.
Figures compiled by John Geraghty of LABrokers.ie for the Irish Independent show that annuity rates have dropped sharply. He looked at a 65-year-old male looking for an annuity rate guaranteed for the first five years. Mr Geraghty said that the annuity rate at the moment was 5.392pc.
"If the person had €100,000 to purchase an annuity then that would give him a pension of €5,354 a year," he said.
But as recently as April a person with the same pension pot would have got a rate of 6.075pc.
This would have have given him €6,037 a year.
The difference in annuity rates means someone purchasing one now will be €683 worse off a year than someone who bought an annuity in April.
For someone with a €500,000 pension pot to buy an annuity the difference works out at more than €3,400 a year.
Those with defined contribution pensions and the self-employed tend to buy annuities. But Mr Geraghty said people might be wise to put off buying one while rates are low.
Some people were continuing to work, while others were going ahead with their retirement but putting off investing in an annuity, he said.
"People tend to live for 20 years in retirement so you have to make your pension last," Mr Geraghty said.