Retirement savers may opt to spend more money on annuities – but insurers have slashed lifetime guaranteed incomes by up to 17% in the past year.
Trade body the Association of British Insurers revealed more savers picked an annuity ahead of alternative investments in the past three months.
More than 21,000 savers paid £1.1 billion into annuities but research shows some of the biggest insurance companies have cut rates leaving customers much worse off than they would have been if they bought an annuity before flexible access kicked in a year ago.
In that time, the economy has improved, interest rates have stayed the same and despite some volatility, the stock market has gained in value.
The Daily Mail accuses insurance companies of keeping quiet about the rates paid by annuities by failing to publish sales data although company results show the companies have soaring profits.
How annuity payments have plunged
Details of annuity payments made by two leading insurers were published to illustrate how pension incomes have dropped like stones during the year.
Aviva paid an annual income of £2,708.96 to a 65-year-old cashing in a £50,000 pension on January 1, 2015.
The same saver would have received £2,249.90 on January 1, 2016 – a shortfall of £459.06 a year, which adds up to lost income of £9,181,20 if the saver lived to 85 years old.
Prudential also showed badly on the comparison, with savers seeing incomes cut by 15.4% – equal to £417.51 a year or £8,350.20 over a 20-year retirement.
Profits up by millions
Aviva profits were up 20% to £2.7 billion in the last year, while Prudential saw a rise of 60% to £1.7 billion.
Both companies say low interest rates and increased regulatory burden were responsible for the cuts. Prudential also blamed falling sales.
An annuity is a lifetime investment contract that returns a guaranteed income until death.
Once pension cash is invested in an annuity, the arrangement cannot be broken.
However, the government has consulted on allowing annuity holders to sell their contracts on a secondary market and is proposing new legislation to break the grip of insurance companies on the market later this year.
