The value of retirement income from annuities has dropped since Britain voted to leave the European Union in the Brexit referendum.
Pension savers who want to guarantee a retirement income for life have seen annuity rates adjusted downwards at least a dozen times since the referendum and financial experts are warning they may slump even further.
A standard annuity for a man aged 65 years old now pays an income for life of close to £4,900 a year for an investment of £100,000.
But annuity rates have plunged by around 37% since 2008 and the trend reveals a more marked drop in value for the contracts bought by retirees with their pension pots.
The reason is annuity pay outs are based on investing savers’ cash in government bonds.
Rates keep on falling
Gilt yields have steadily dropped over the years with the same 65-year-old with £100,000 to invest could have bought a £7,850 a year income in 2008.
“Annuity rates keep on falling and there’s no sign of when they might stop,” said a spokesman for online financial supermarket Hargreaves Lansdown.
“For many investors, buying a mix of annuities while leaving some money invested might be the best way forward.”
Annuities are put into gilts as a safe and conservative investment.
However, their returns are dependent on gilt yields that have sunk in value since the financial crisis.
Fears for retirement income
Quantitative easing has seen the values fall as returns are based on the official interest rate set by the Bank of England, which has sat at a record low of 0.5% for several years.
The fear is annuities will lose more value if the Bank votes to cut the interest rate again, as threatened by governor Mark Carney.
Buyers with existing annuities are unaffected by rate changes, as their income is guaranteed for life.
New investors have their annual income forecast worked out on the current value of gilts.
Some financial experts suggest not investing in annuities while waiting to see how the market responds, but recent history shows this to give a lower retirement income as the market keeps dropping.
In the past six months, the value of a £100,000 annuity has fallen £50 from £4,930.
