The "annuity trap" is set to catch more victims as members of occupational defined-contribution pension schemes reach retirement age.
The Irish Association of Pension Funds (IAPF) believes the five companies in the €200 million annuities market will become increasingly reluctant to compete to take on the long-term risk of providing annuities on a mass scale. The IAPF is now taking part in a review of the operation of the annuity market being conducted by the Partnership Pensions Review Group, under the terms of the Towards 2016 social partnership agreement.
Annuity rates depend on two things: the long-term yields in gilts - which have in the past moved up and down in tandem with interest rates - and the fact that we are all living longer.
To give a straightforward example of how crucial annuity rates are to a person's lifestyle, an annuity rate of 5 per cent will mean that a fund of €500,000 will result in an annual pension of €25,000 a year. But if annuity rates were still 10 per cent, the pension would be €50,000 a year.
The fact that interest rates have risen lately won't necessarily result in better annuity rates, as continuously improving mortality statistics will prevent annuities ever going back up to their previous highs.
The importance of life expectancy means that the annuity trap is especially harsh on women, who will be offered lower annuity rates than men. This means that a woman with the same size pension fund as a man will have to live off a much lower retirement income - up to 20 per cent less than a man retiring at the same age.
