Pension savers have to brace themselves for poorer annuity rates as growing demand from defined-benefit schemes and demographic pressures further depress rates.
Independent pension analyst Dr Ros Altmann said the combination of sharp growth in demand from final-salary schemes and a rapid increase in baby boomers retiring from next year is going to push annuity rates even lower.
She said: “We all know annuity rates are getting worse and the reason is not just that we are living longer and not just that interest rates are artificially depressed because of the measures taken to combat the credit crunch.
“It is also because final-salary schemes are increasingly coming into the annuity market to buy-out their liabilities. That source of demand for annuities was not there before. At the same time more and more people are in DC schemes, at the same time that the demographics are about the explode, therefore the calls on the individual annuity market are rising, you have also got this collective potential giant call from thousands of pensioners at a time on the annuity volume available.”
Altmann said the impact of Solvency II has been widely predicted to cut annuity rates and plans to end the age 75 annuity rule do not offer any relief for most people. She suggested that more radical innovation was required for the annuity market.
“It is good news that the age 75 rule has been abolished but this only really works for the very best off. We need more radical change, a revolution in the annuity market,” she said.