31 October 2012 last updated

Annuity Rates - October 2012

Annuity rates continue to fall as providers adjust for Unisex rates in December even though gilt yields recover from all time low Standard rates:   0.90% Smoker rates:   1.77% Annuity rates have decreased again for the sixth consecutive month. Our benchmark annuity for a a 65 year old male on a level single life basis reduced £176 pa in October reaching another all time low income of £5,488 pa. Gilt yields ended the month at 2.31% rising 13 basis points and this would indicated annuities could increase by 1.3%. The highest point attained was 2.38% as investor confidence increased with the prospect of Greece securing the next 31 billion euro bailout deal. This did little to pension annuities as providers have been pricing for the EU Gender Directive.

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Annuity Rates Changes Increase No change Decrease   6%   12%   82% Increases of: 0.3% - 1.0%   Decreases of: 0.2% - 5.8%

Fig 1: Annuity rate changes for the whole market for October 2012

Annuity Rate Changes - Standard   Male * Female * 50% Joint Level   0.77%   1.12%   0.92% Level + 10 yr 100% joint **   0.68%   1.15%   0.78% 3% escalation   0.65%   0.95%   1.13% Annuity Rate Changes - Smoker   Male * Female * 50% Joint Level   1.52%   1.45%   1.64% Level + 10 yr 100% joint **   1.41%   1.90%   2.92% 3% escalation   1.21%   1.91%   2.13%

Fig 2: Annuity rate changes for 1 month ending October 2012

* 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 1.8% across the board with 100% joint life annuity rates decreasing by up to 5.8% for those aged 55.

Standard annuity rates also decreases across the board for males, females and joint between ages of 55 and 70 with the largest decreases for those aged 55 and 65 od between 2% and 3.5%.

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   September October November 1 month   2.29%   1.74%   2.20% 3 months   3.86%   2.80%   6.39% 6 months   0.54%   1.26%   4.07% Smoker Annuities - Change Expected   September October November 1 month   1.22%   2.21%   3.07% 3 months   4.33%   2.60%   6.64% 6 months   3.09%   2.21%   6.14%

Fig 2: Annuity rate changes required to match gilt yields

Gilt yields increased this month from 2.18% to 2.31% and were as high as 2.38%. Providers have decreased annuity rates further than expected and this suggests that standard annuity rates could increase by 2.54% and smoker annuities by 3.07% in the short term.

However, the EU Gender Directive may be influencing the pricing of annuities as providers have been reducing annuity rates aggressively and this position will benefit their 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 October and this theme continues in the market as they follow each other with lower rates. In particular market leaders such as Just Retirement, Liverpool Victoria and Partnership have reduced rates and have had very little margin for any improvements as with last month.