Enhanced annuities have been hit the hardest since the introduction of the pension freedoms, according to research by Moneyfacts.

Its latest UK Personal Pension Trends Treasury Report, shows that in some cases annual income has been cut six times more than standard annuities. In a scenario where a person age 70 is purchasing an annuity, Moneyfacts said enhanced annuity rates have fallen on average by 6.8 per cent; for a 75 year old, it increases to a range up to 9.9 per cent.

Despite this, rates for standard annuities have risen, with an increased rate of 1.07 per cent based on a £10,000 pension pot, and 1.66 per cent on a £50,000 pension pot for a 65 year old.

As a result, 2017 was the first calendar year since 2013 that standard annuity rates actually increased. This means that average annual standard annuity income has now increased by 13 per cent since hitting an all-time low in September 2016 in the aftermath of the EU referendum result.

Moneyfacts said due to the increase of standard annuity rates with a decrease of enhanced annuity rates, the uplift offered by an enhanced annuity has been greatly reduced. During Q4 2017 the average uplift fell from 16.7 per cent to 12.1 per cent, its lowest level since January 2013, when enhanced annuity providers adopted ultra-cautious pricing following the switch to gender neutral rates.

Since pension freedoms were introduced in April 2015, the average annual enhanced annuity income has fallen by between 10.2 per cent and 14.2 per cent for a 65-year-old (depending on purchase price) and by between 11.7 per cent and 15.6 per cent for a 70-year-old. By contrast, standard annuity income has fallen by between only 2.6 per cent and 3.2 per cent.

Moneyfacts head of pensions Richard Eagling said: “Before pension freedoms were introduced the enhanced annuity market was functioning well, with healthy competition ensuring typical uplifts of around 21 per cent.

"However, it is difficult to escape the conclusion that the enhanced annuity market has been more adversely impacted by pension freedoms than the standard annuity market, meaning poorer retirement outcomes for those with shorter life expectancies retiring now than pre-April 2015. Nevertheless, it still remains the case that enhanced annuities offer valuable extra income for those who qualify for them, so they should not be overlooked.”

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