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Introduction of pension freedoms sees annuity rates fall to an all time low

23rd April 2015

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Annuity rates have collapsed to an all-time low less than a month on from the introduction of the new pension freedoms, a new survey by Investment Life & Pensions Moneyfacts has found.

The challenging pricing conditions facing providers have intensified in 2015 as lower demand and a sharp fall in government bond yields, which annuities are largely pegged to, have conspired to force rates down.

Savers can swap their pension pot for an annuity when they retire, which provides them with a guaranteed income for the rest of their life. Under the old pension rules all retirees were eventually forced to buy and annuity, which proved highly unpopular as they have often been labelled as offering bad value.

The analysis found that after a disappointing 2014 in which the average annual income payable from a standard annuity fell by 5.7%, 2015 has already seen an even more marked decline in annuity rates. As table 1 below shows, the average annual income payable on a single life standard level without guarantee annuity for a 65-year-old with a pension pot of £10K has fallen by 5.9% since the beginning of the year and by 6.4% for a £50K pension pot.

This latest drop in annuity rates means that the average standard annuity pension income is now at its lowest ever level, surpassing the previous all-time lows recorded in November 2012 just prior to the introduction of gender neutral pricing in December 2012.

Richard Eagling, head of pensions at Moneyfacts said: “The prospects of securing a comfortable retirement have taken a further blow with news that standard pension annuity rates have hit an all-time low. In many cases, retirees looking for a secure income now face the unenviable position of annuitising at the lowest point in the product’s history.

“This is particularly unfortunate for those individuals who may have deferred making a choice until the introduction of the pension freedoms but have since decided that an annuity is still the most suitable product for them.

“Could we be about to see a wave of new annuity business hitting the market at a time of record low rates in the same way that many individuals rushed to annuities before the introduction of gender neutral pricing, only to unwittingly fix their incomes in at the previous all-time lows?”

 Table 1: Falling average single life standard pension annuity rates since the start of 2015

 

Average single life
standard annuity rate
Age 65

(£10K purchase price)

Average single life
standard annuity rate
Age 65

(£50K purchase price)

1.1.15

£506

£2,727

23.4.15

£476

£2,550

Change

– 5.9%

-6.4%

Figures show gross annual annuity payable monthly in advance. Figures based on an annuitant aged 65 buying a single life standard level without guarantee annuity

Source: Moneyfacts 23.4.15

Joint life annuities

Investment Life & Pensions Moneyfacts also found that joint life annuity rates have been cut even more severely since the beginning of the year than their single life counterparts. As Table 2 highlights, the average joint life level without guarantee pension annuity income) for a male and a female aged 65 has fallen by between 6.7% and 6.8%, depending upon purchase price, so far this year.

Table 2: Falling average joint life standard pension annuity rates since the start of 2015

 

Average joint life
standard annuity rate
Male and Female Age 65

No reduction on first death

(£10K purchase price)

Average joint life
standard annuity rate
Male and Female Age 65

No reduction on first death

(£50K purchase price)

1.1.15

£428

£2,346

23.4.15

£399

£2,185

Change

-6.7%

-6.8%

Figures show gross annual annuity payable monthly in advance. Figures based on an annuitant aged 65 buying a joint life standard level without guarantee annuity (no reduction on first death)

Source: Moneyfacts 23.4.15

Enhanced annuities

Enhanced annuity rates have proved to be slightly more resilient than standard annuities in 2015, although they have also seen sizeable reductions concluded Moneyfacts. The average enhanced pension annuity rate – level without guarantee – for an individual aged 65 has fallen between 5.3% and 6%, depending upon the purchase price, since the start of the year. Enhanced annuity rates are now at their lowest levels since April 2013.

Table 3: Falling average enhanced pension annuity rates since the start of 2015

 

Average single life
enhanced annuity rate
Age 65

(£10K purchase price)

Average single life
enhanced annuity rate
Age 65

(£50K purchase price)

1.1.15

£612

£3,250

23.4.15

£579

£3,055

Change

-5.3%

-6%

Figures show gross annual annuity payable monthly in advance. Figures based on an annuitant aged 65 buying a single life enhanced level without guarantee annuity

Source: Moneyfacts 23.4.15

Eagling added: “The one saving grace for retirees is the enhanced annuity market where rates have been more resilient and have yet to fall to an-all time low. The average potential uplift available through an enhanced annuity compared with a standard annuity is currently around 22%, an extra level of income that could make a big difference in the current low annuity rate environment.”

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