UK Annuity Returns Fall After 2014 Budget Changes

By Fiona Moore, for 22 September, 2014

A new report from Towers Watson suggest that UK employees who choose to take an annuity on retirement may receive lower payouts each year after the announcement of the Government's new Defined Contribution (DC) pension changes.

Budget 2014 allowed UK retirees greater flexibility on how to provision for retirement, revoking the requirement that persons must take an annuity. Most changes take effect from April 6, 2015.

Towers Watson said annuities market research shows that incomes offered to retirees looking to purchase an annuity have started to decline since the budget announcement earlier in the year, particularly for people with small DC pension pots. The best available annuity offered to a 65-year-old looking for a single income from a DC pension pot worth GBP25,000 (USD41,000) has declined by 3.3 percent since the Budget, from GBP1,508 per year in March, to GBP1,458 in August. However, for larger pension pots the decline has been less significant, with a GBP50,000 DC pot declining by 1.8 percent and a GBP100,000 pot decreasing by 0.8 percent.

Commenting, Will Aitken, Senior Consultant at Towers Watson, said: "Given how markets have moved, we would have expected rates to have got slightly worse, but it's interesting to see the varied impact the Chancellor's Budget has had on annuity rates, depending on the size of a person's pension pot. Someone reaching retirement with a fund of GBP100,000 is still more than likely to buy a secure annuity income, but someone with GBP25,000 has a far more difficult decision. If they do opt for an annuity it's likely to be because they are in good health and are anticipating a relatively long retirement, suggesting their annuity will be paid for longer than average. This would explain the accelerated decline in annuity income for smaller funds."

A survey of employers conducted by Towers Watson in April showed that just two in five employees are now expected to choose to buy an annuity when they retire. Aitken said: "Clearly a lot of companies are preparing for employees to explore alternative income options once they reach retirement, but the picture is still very mixed from company to company. That uncertainty is to be expected. Someone on course to have a fund of GBP10,000 may have a very different intention to someone on track for GBP100,000. Companies need to work out what their employees are anticipating at retirement as a first step towards predicting how, when, and with what they will retire."

Tags: Interest | Employees | Retirement | Budget | Expats |


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