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31 August 2012 last updated
Annuity Rates - August 2012

All time low levels have been reached by annuity rates although increases may now be possible

Standard rates:  
annuity rates down 1.99%
Smoker rates:  
annuity rates down 0.92%

For the fourth consecutive month annuity rates have decreased to a new all time low. Our benchmark annuity for a a 65 year old male on a level single life basis reduced £56 pa in July to an income of £5,746 pa.

Since June 2011 the annuity income for our benchmark example has reduced by £1,060 pa from a high of £6,806 pa or a fall of 15.5%. The recent decreases have gone beyond the falls in gilt yields which actually increased slightly by 3 basis points in August and annuity rates now could rise in the short term assuming yields remain at current levels or increase.

Over a longer time period gilt yields have reduced from 3.56% in June 2011 to 2.07% today or 149 basis points and annuities should reduce by 14.9% suggesting they could fall by a further 2.1%.

 
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Providers reduce annuities further in short term


Find out more: gilt yields for August


The 15-year gilt yields have been volatile in August starting at 2.04% and increasing to 2.27% as the European Central Bank (ECB) convinces investors that there will be support for the euro and protection for countries that require a bailout. Gilt yields have reduced at the end of the month back to 2.07% as the ECB is about to announce it's plans to buy sovereign debt in the next meeting on 6 September. Investors have been moving funds out of European bonds to safer havens ahead of the announcement by the ECB so a positive response at this meeting will seek equity markets and gilt yields increase.

Overall 89% of annuities reduced with standard annuity rates lower by 1.99% which is more than last month. On the other hand smoker annuities are lower by 0.92% which is less than last month and this is repeating the trend from July, standard annuities reducing at a greater rate and smoker annuities decreasing at a lessor rate.

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 August 2012:

Annuity Rates Changes
Increase No change Decrease
annuity rates increase   7%
annuity rates no change   4%
annuity rates decrease   89%
Increases of:
0.3% - 1.5%

  Decreases of:
0.2% - 4.1%
  Fig 1: Annuity rate changes for the whole market ending August 2012

Fig 1 above shows that 7% of annuities increased all for smoker rates for annuitants aged 55 for males and females due to Reliance Mutual improving their rates in the market. These increases were from 0.3% to 0.8% and there were also increases for joint life smokers aged 65 of 1.5%. All standard annuities declined by between 0.9% and 4.1% while the decreases for smoker annuities were by 0.2% to 2.6%.

Equity markets were steady starting at 5,635 and ending at 5,711 with a range of 75 points so pensioners should not have experienced a significant change in their pension fund when purchasing an annuity during August.

What happened to rates during August

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 August 2012:


Annuity Rate Changes - Standard
  Male * Female * 50% Joint
Level
annuity rates down   1.73%
annuity rates down   2.62%
annuity rates down   1.79%
Level + 10 yr
100% joint **
annuity rates down   1.54%
annuity rates down   2.58%
annuity rates down   1.84%
3% escalation
annuity rates down   1.89%
annuity rates down   1.98%
annuity rates down   1.96%
Annuity Rate Changes - Smoker
  Male * Female * 50% Joint
Level
annuity rates down   1.59%
annuity rates down   0.79%
annuity rates down   0.64%
Level + 10 yr
100% joint **
annuity rates down   1.21%
annuity rates down   0.50%
annuity rates down   0.07%
3% escalation
annuity rates down   1.51%
annuity rates down   0.70%
annuity rates down   1.17%
  Fig 2: Annuity rate changes for 1 month ending August 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.

The largest reductions in pension annuity income were from standard annuities based on a fund size of £100,000, level basis for males, and joint aged 75 and females aged 70 to 75. The fall in income was between £220 pa to £260 pa or from 2.6% to 4.1%.

For smokers based on a fund size of £100,000 standard annuities on a level basis the largest decrease was for male single life aged 70 with a decrease of £187 pa or 2.2% and there were are large range of decreases between £15-£140 pa for males, females and joint annuities. The largest increase was for 100% joint life aged 65 of £78 pa or 1.5%.

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
  July August September
1 month
annuity rates up   2.81%
annuity rates down   1.19%
annuity rates up   2.29%
3 months
annuity rates down   1.41%
annuity rates down   2.17%
annuity rates up   3.86%
6 months
annuity rates up   0.33%
annuity rates down   1.02%
annuity rates up   0.54%
Smoker Annuities - Change Expected
  May June July
1 month
annuity rates up   3.96%
annuity rates down   0.77%
annuity rates up   1.22%
3 months
annuity rates up   0.58%
annuity rates down   0.26%
annuity rates up   4.33%
6 months
annuity rates up   4.29%
annuity rates up   3.62%
annuity rates up   3.09%
  Fig 2: Annuity rate changes required to match gilt yields


Gilt yields increased slightly this month from 2.04% to 2.07% although providers have decreased annuity rates further than necessary and this suggests that standard annuity rates could increase by 2.29% and smoker annuities by 1.22% and possibly more in the medium term assuming gilt yields remain at current levels or increase.

Providers have reduced impaired annuity rates during August and this appears to be a theme 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.

All 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 2012.

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Annuity Rates
  Age Single Joint  
  55 £4,206 £3,946  
  60 £4,699 £4,438  
  65 £5,433 £4,954  
  70 £5,983 £5,409  
£100,000 purchase, level rates, standard
Unisex rates and joint life basis
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