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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:  
annuity rates down 0.90%
Smoker rates:  
annuity rates down 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.

Annuity Rates Review October 2012
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Annuities lower as provide
rs price for Unisex rates

Find out more:
October analysis of gilt yields

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

Gilt yields increased by 13 basis points to 2.31% in October and since reaching 2.07% on 31 August 2012 are up 24 basis points since this time. As annuity rates are based on the 15-year gilt yields, as a general rule they should also increase by 2.4%. For our benchmark this would mean a rise of £138 pa from the August figure of £5,746 pa to an expected £5,884 pa but instead annuities have reduced £141 pa to £5,605 pa. Therefore our benchmark is 4.7% lower than expected and this can only be due to the providers expectation of lower males rates due to Unisex pricing to be introduced on 21 December 2012.

Overall 82% of annuities reduced with standard annuity rates lower by 0.90% which is more than last month. On the other hand smoker annuities are lower by 1.77% which is more than last month.

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 October 2012:

Annuity Rates Changes
Increase No change Decrease
annuity rates increase   6%
annuity rates no change   12%
annuity rates decrease   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

Fig 1 above shows that 7% of annuities increased for a combination of standard and smoker rates. These increases were from 0.3% to 1.0% for standard life rates for females aged 75.

Of the 82% of decreases both standard and smoker rates experienced widespread falls. For standard rates decreases of between 1.4% and 3.6% were common for those aged 55 and smokers tended to decreases of between 1.0% to 3.7% for those aged 55 to 70 with the largest falls for 100% joint life aged 55 to 60 falling by between 4.5% to 5.8%. This also produced the largest fall by value with 100% joint life aged 55 experiencing a £270 pa reduction.

Equity markets were steady starting at 5,742 and ending at 5,783 reaching a high of 5,917 with a range of 175 points. This means so pensioners should not have experienced a significant change in their pension fund when purchasing an annuity during October.

What happened to rates during October

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 October 2012:

Annuity Rate Changes - Standard
  Male * Female * 50% Joint
annuity rates down   0.77%
annuity rates down   1.12%
annuity rates down   0.92%
Level + 10 yr
100% joint **
annuity rates down   0.68%
annuity rates down   1.15%
annuity rates down   0.78%
3% escalation
annuity rates down   0.65%
annuity rates down   0.95%
annuity rates down   1.13%
Annuity Rate Changes - Smoker
  Male * Female * 50% Joint
annuity rates down   1.52%
annuity rates down   1.45%
annuity rates down   1.64%
Level + 10 yr
100% joint **
annuity rates down   1.41%
annuity rates down   1.90%
annuity rates down   2.92%
3% escalation
annuity rates down   1.21%
annuity rates down   1.91%
annuity rates down   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
annuity rates up   2.29%
annuity rates up   1.74%
annuity rates up   2.20%
3 months
annuity rates up   3.86%
annuity rates up   2.80%
annuity rates up   6.39%
6 months
annuity rates up   0.54%
annuity rates up   1.26%
annuity rates up   4.07%
Smoker Annuities - Change Expected
  September October November
1 month
annuity rates up   1.22%
annuity rates up   2.21%
annuity rates up   3.07%
3 months
annuity rates up   4.33%
annuity rates up   2.60%
annuity rates up   6.64%
6 months
annuity rates up   3.09%
annuity rates up   2.21%
annuity rates up   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.

Annuity Rates
  Age Single Joint  
  55 £6,361 £5,898  
  60 £6,842 £6,244  
  65 £7,474 £6,843  
  70 £8,405 £7,660  
£100,000 purchase, level rates, standard
Unisex rates and joint life basis
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