Annuity rates take another tumble

27th January 2015

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Pensioners who want to convert their retirement savings into an income for life with an annuity are getting a worse deal than a year ago as gilt yields caused rates to fall further during the last quarter of 2014.

The latest Moneyfacts Treasury Report: Personal Pension and Annuity Trends has revealed the extent to which the downward pressure exerted by the continuing fall in gilt yields during Q4 2014 impacted annuity providers, with annuity rates across both the standard and enhanced sectors experiencing some heavy reductions.

Based on a standard level without guarantee annuity, the figures show that the average annual income for a 65-year-old with a pension pot of £10,000 fell by 2.8% during Q4 2014, and by 2.5% for a £50,000 pension pot.

The report also revealed how challenging 2014 proved to be for annuity pricing, with a record volume of annuity re-pricing activity taking place. Over the course of 2014, all providers cut rates across the full range of annuity types and options, with the average annual income payable from a standard level without guarantee annuity for a 65-year-old falling by 5.7% at both the £10,000 and £50,000 purchase points during the calendar year.

This latest drop means that average annuity rates have now fallen in 16 out of the 20 calendar years since Moneyfacts started surveying the market in 1994.

Richard Eagling, head of pensions at Moneyfacts, said: “The ability of providers to withstand the downward pressure on annuity rates being exerted by lower gilt yields has been curtailed by the reduced demand for annuities since the 2014 Budget, which shows no signs of abating. As a result, annuity rates finished 2014 at their lowest levels since July 2013.”

Enhanced annuities, which normally give people with health conditions and smokers a higher rate, saw some sizeable reductions in Q4 2014, with rates on average cut more severely than standard annuities. The average annual income payable from a level without guarantee enhanced annuity for a 65-year-old, based on a £10,000 pension pot, fell by 3.1% and by 2.9% on a £50,000 pension pot.

The report also highlighted how enhanced annuity rates have been more severely impacted by the 2014 Budget than standard annuity rates. The average annual income from a level without guarantee enhanced annuity for a 65-year-old has fallen by 6.8% since the Budget compared with a 5.7% fall in income for the equivalent average standard annuity.

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