Annuities have consistently outperformed both the UK equity income fund and cash ISA returns over the last 10 years, IRESS UK has reported.

According to the IRESS Retirement Report, while both cash and annuities are low risk and offer certainty, annuities have consistently delivered higher yield over the last ten years.

The highest average annuity rate of the last three years was 5.88 per cent in August 2015 and the lowest recorded in this period was 3.74 per cent.

IRESS’ new Relative Annnuity Yield Index looked at the relative performance of annuity yields against cash and equity yields over the last ten years. In its first index measure, equity yield minus annuity, annuitants who chose the product on the basis of it providing stability during the last 10 years have seen more consistent and reliable returns than with equities.

Nonetheless, the index also found that cash was still a viable investment option at the beginning of the index, but a series of Bank of England rate cuts between November 2008 and March 2009 negatively affected cash ISA rates. While annuities also felt the impact, figures highlighted that this was to a lesser extent.

More notably, however, annuities were seen to fluctuate since the introduction of the pension freedoms in 2015. Sales dropped steeply following the announcement of the freedoms, yet have fluctuated since they were actually introduced. In Q2 2015 total annuity sales were at £990m which rose by 18 per cent to £1.17bn in Q3. The final quarter of 2015 was more consistent at £1.1bn before dropping back to £950m in Q1 2016.

Furthermore, when it comes to the comparison of drawdown to annuity sales, the former outsold the latter by 2,500 in Q2 2015, 3,720 in Q3 2015 and 5,200 in Q1 2016. Annuities slightly outsold drawdown by 600 in Q4 2015.

IRESS UK managing director Simon Badley, said: “The yield performance of annuities, especially against an independently calculated sustainable withdrawal rate, serves as an important reminder that they continue to offer a valuable option for investors looking for absolute certainty in retirement.

“It’s true that the negative commentary and falling rates over the years may have made annuities appear less attractive in comparison to other options for retirement income, but industry opinion suggests a plateau has now been reached. It now appears that the retirement market is readjusting to a new normal following the dramatic swings in the wake of the pension freedoms. The relative value of annuities assessed against other retirement income options deserves a fair hearing and we hope the IRESS Relative Annuity Yield Index helps deliver a new context for comparison.”

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