Retirement: The Alternatives to Falling Annuity Rates; Chris Jones, Wealth Manager at Torquil Clark, Reports

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Byline: Chris Jones

Ihave commented previously on the vast range of retirement income options now open to those starting to draw on their pension funds. The further decline that we have seen in conventional annuity rates, even in the last few months, means ever fewer people can afford not to consider these alternatives.

The long-term decline in pension annuity rates is well documented. The UK annuity market is well developed and whilst dominated by a handful of players, it has arguably been a very competitive one in recent years.

However, for all that it makes sense to shop around to improve terms the reality is that falling Gilt yields and increased life expectancy means that a 65 year-old man today can buy roughly a third less income than his counterpart ten years ago.

Even in the last three years the income that can be purchased via a conventional pension annuity has fallen by around a sixth. At the same time we have of course seen the "lost decade" for stock markets meaning that many of these pension funds not only face low annuity rates but may have struggled to show any investment growth in real terms over that time.

Some will be able to defer taking their income and hope that rates will improve. For this to pay off the "cost of delay" argument says that they will need to see a substantial return on their funds during that deferment period. If the funds are appropriately invested for that stage of retirement planning this should be unlikely.

For those who have a need to draw income today but perhaps cannot tolerate the uncertainties of income drawdown, investment linked annuities continue to offer good potential for a rising income over the medium to long-term. The starting income from these contracts is partly derived from today's annuity rates but increasingly, over time, will reflect the return on the underlying assets to which that income is linked. …