Annuity payouts slumped by 11.5 per cent last year, their biggest fall since 1998. Rates have now fallen in 15 of the past 18 years and the average annual annuity income is less than half what it was in 1994, according to Moneyfacts.
The company blamed the latest fall on the record low gilt yields resulting from quantitative easing and uncertainty over the eurozone. The switch to gender-neutral pricing in December also had an effect, although Richard Eagling of Moneyfacts said: "The full impact of the switch to gender neutral pricing has yet to play itself out."
The lower rates mean a 65-year-old man with a £50,000 pension pot will get £274 less now compared with a year ago. And research from Prudential shows that people planning to retire this year expect to have to live on £15,300 a year – £3,400 lower than in 2008.
Today's announcement about the future of the retail prices index (RPI) by the Office for National Statistics could herald further bad news for pensioners. The National Statistician, Jil Matheson, above, is expected to recommend that RPI be adjusted to bring it more into line with the lower consumer prices index (CPI). With many annuities linked to RPI, the change could have a disastrous effect on retirement incomes.
According to the pensions expert Tom McPhail at Hargreaves Lansdown, the switch could leave someone with a £100,000 pension pot £9,500 worse off over 20 years. "While a difference of less than 1 per cent can seem small, over the course of a retirement this can have large effects," he warned.