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30 November 2012 last updated
Annuity Rates - November 2012

UK Annuities have been reduced by providers ahead of the new Gender Neutral pricing to be enforced on 21 December

Standard rates:  
annuity rates down 0.86%
Smoker rates:  
annuity rates down 1.55%

Standard annuity rates were lower by a similar amount to the fall in 15-year gilt yields this month. For an 8 basis point fall for the month we would expect annuity rates to fall by about 0.8% and this was about right.

Smoker annuities decreased by 1.55% which exceeded what we were expecting and impaired annuity rates were also aggressively reduced during the month.

Despite the large range of negative coverage of the Eurozone, Greece, Spain, Cyprus as well as the US Fiscal Cliff threat and poor economic growth prospects around the world gilt yields have not reduced by much.

 
Annuity Rates Review November 2012
 
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EU Gender Directive already been discounted


Find out more:
November analysis of gilt yields

unisex rates to lower pensioner income
solvency 2 will lower annuity rates by 2014

Gilt yields decreased by 8 basis points to 2.23% in November and as a rough guide this would translate to a 0.8% decrease in annuity rates. Standard annuities decreased by an average of 0.86% whereas for our benchmark pension annuity example decreased by 0.2% although over three months it is lower by 2.6% whereas gilt yields have increased by 16 basis points.

This would suggest that annuity rates for our example can increase by 4.2% when comparing changes over a three month period. This is a common theme for all annuities and indicates providers are locked in a negative pricing cycle in anticipation of the EU Gender Directive and Unisex annuity rates.

Fig 1 below shows the
annuities changes for the whole market and the proportion that have either increased, decreased or or did not change. It also shows the range increases or decreases of the annuity rates over 1 month ending November 2012:

Annuity Rates Changes
Increase No change Decrease
annuity rates increase   8%
annuity rates no change   0%
annuity rates decrease   92%
Increases of:
0.4% - 1.2%

  Decreases of:
0.2% - 4.8%
  Fig 1: Annuity rate changes for the whole market

Fig 1 above shows that 8% of annuities increased for a combination of standard and smoker rates. These increases were from 0.4% to 1.2% for standard life rates for females aged 75.

Of the 92% of decreases standard annuities were not as significant with many decreasing by under 0.5%. The largest decreases were for those aged around 75 as Canada Life decreased their annuity rates by between 1.3% to 2.6% and they are the market leaders at this age. Rates for females also decreased by a similar amount across the board even though the expectation is for rates to increase with the gender neutral pricing. The largest fall in monetary terms was for 50% joint life, level basis aged 60 with a fund of £100,000 experienced a decrease of £166 pa.

Smoker annuities experienced a greater decrease with those aged 55 lower from 1.0% to 4.8% and a range of different losses across the board for all other age groups. The largest monetary fall was for 50% join, 3% escalation aged 65 with a fund of £100,000 experienced a decrease of £177 pa. Also males on a single life, level basis aged 55 for the same fund value experienced a decrease of £169 pa and based on the Office of National Statistics (ONS) he would be expected to live 32.8 years so the loss in income would be a significant £5,543 over his lifetime.

For a female the largest loss was also aged 55 on a single life, level basis and same fund value on a single life, level basis aged 55 for the same fund value experienced a decrease of £155 pa and based on the ONS she would be expected to live 36.2 years so the loss in income would be similar at £5,611 over her lifetime.

Equity markets were higher starting at 5,783 and ending at 5,867 up only 84 points. Pensioners still invested should have experienced slight increase in their pension fund when purchasing annuities during November.

What happened to rates during November

Fig 2 below shows for a fund of £100,000 the change in annuity rates for males, females and joint from age 55 to 75 with different annuity options such as level or escalating over 1 month ending November 2012:


Annuity Rate Changes - Standard
  Male * Female * 50% Joint
Level
annuity rates down   0.80%
annuity rates down   0.51%
annuity rates down   0.84%
Level + 10 yr
100% joint **
annuity rates down   0.78%
annuity rates down   0.79%
annuity rates down   0.86%
3% escalation
annuity rates down   0.93%
annuity rates down   1.47%
annuity rates down   0.98%
Annuity Rate Changes - Smoker
  Male * Female * 50% Joint
Level
annuity rates down   0.73%
annuity rates down   1.42%
annuity rates down   2.21%
Level + 10 yr
100% joint **
annuity rates down   1.31%
annuity rates down   1.15%
annuity rates down   1.97%
3% escalation
annuity rates down   1.23%
annuity rates down   1.76%
annuity rates down   2.69%
  Fig 2: Annuity rate changes for 1 month
  * Male and female on a single life basis only
  ** Joint life option is level, 100% spouse benefit and no guarantee


The above table shows the average changes for level, level plus 10 year guarantee and 3% escalation for males, females and joint life annuitants between the ages of 55 and 75.

Smoker annuities suffered the greatest reductions based on a fund size of £100,000 with an average fall of 1.55% across the board with 100% joint life annuity rates decreasing by up to 4.8% for males and females aged 55.

Standard annuity rates also decreases across the board for males, females and joint of all ages and in particular for those aged 75 with decreases of between 1.3% to 2.6%.

Annuity rates change to match gilt yields

Annuity rates are based on the 15-year gilt yields which are primarily used to secure the income for pension annuities. Fig 3 below compares the difference between annuity rates and gilt yields showing the direction annuities need to move and the percentage amount to match gilt yields. It shows the difference when compared over the last 1, 3 and 6 months.


Standard Annuities - Change Expected
  October November December
1 month
annuity rates up   1.74%
annuity rates up   2.20%
annuity rates up   0.06%
3 months
annuity rates up   2.80%
annuity rates up   6.39%
annuity rates up   4.18%
6 months
annuity rates up   1.26%
annuity rates up   4.07%
annuity rates up   7.92%
Smoker Annuities - Change Expected
  October November December
1 month
annuity rates up   2.21%
annuity rates up   3.07%
annuity rates up   0.75%
3 months
annuity rates up   2.60%
annuity rates up   6.64%
annuity rates up   6.15%
6 months
annuity rates up   2.21%
annuity rates up   6.14%
annuity rates up   10.26%
  Fig 2: Annuity rate changes required to match gilt yields


Gilt yields decreased this month from 2.31% to 2.23% and were no higher than 2.33%. Providers have decreased annuity rates further than expected and this suggests that standard annuity rates could increase by 4.18% and smoker annuities by 6.15% in the medium term.

The EU Gender Directive is forcing annuity rates lower and this position will benefit provider profit margins while pensioners can expect poorer value for money than expected at this time. For the latest updates see Annuity Rates Review.

Providers have reduced impaired annuity rates during November and in particular the market leaders Liverpool Victoria, Partnershp Assurance and Just Retirement have reduced their rates.

Annuity Rates
  Age Single Joint  
  55 £4,216 £3,974  
  60 £4,702 £4,423  
  65 £5,453 £5,013  
  70 £6,105 £5,482  
£100,000 purchase, level rates, standard
Unisex rates and joint life basis
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