11 June 2012 last updated

Annuity rates fall to lowest levels as gilt yields fail to improve

Providers have reduced annuity rates across the board as concern for Spain and Italy over their debt and borrowing costs increased significantly. Annuity rates fell by between 1.0% and 1.5% across the board with the all leading providers of annuities now reducing their rates after significant reductions in the 15-year gilt yields last month. Standard annuity provider Legal & General reduced their rates following Aviva and Canada Life this means that our benchmark example has reached the lowest ever level. Smoker and impaired annuities have also reduced with Just Retirement, Liverpool Victoria, Aviva, Partnership Assurance and MGM Advantage all reducing their annuity rates. For a male aged 65 with a fund of £100,000 purchasing a single life level annuity the income has reduced by £59 per year to a new low of £5,962 per year compared to the lowest level previously reached in November 2011 at £5,972 pa.

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Annuity rates lower by 24% since 2008

The highest level of recent times was reached in July 2008 with an income of £7,908 pa and since then has reduced by £1,946 pa or a fall of 24.6% and these decreases also apply to impaired annuities. since then equities have also reduced by almost 10% so the combination of falling annuity rates and equities means a pensioner that delayed purchasing a pension annuity in 2008 will have 32% less income each year.

Although the markets welcomed the rescue between the Eurozone and spanish banks worth 100bn euros and yields for Spanish 10-year bonds reduced to under 6%, during the day concerns remained and the cost of borrowing for Italy increased to over 6% and Spain increased to 6.5% which is an unsustainable level in the long term.

The downgrade of Spanish banks continued by credit agency Fitch and the FTSE-100 ended down 23 points at 5,432 while the Dow Jones was down 143 at 12,411 and Europe ended mixed but mostly down about 0.25%. This concern is significant as it may mean the 15-year gilt yields, currently at 2.20% and up by only 1 basis point today, will not improve as investors seek safer investments such as UK government bonds.

As a result annuity rates are likely to continue to fall during this month as standard and smoker annuities have a further 1.67% to reduce before balancing with the gilt yields while impaired annuity rates have about 0.5% further to fall this month.

How to improve annuity income at retirement

With annuity rates continually falling pensioners retiring now may have to accept the income offered if they cannot wait for a future recovery. If they have other pension arrangements such as a final salary scheme or other personal pension plans they could consider an investment based or with profits annuity which could provide initial incomes of 30% or more. As the underlying fund is based on equities the income can go down as well as up although the fund smoothes the level of income to avoid the excessive volatility of the markets.

For any pensioner suffering from a medical condition they could consider impaired annuity can could offer incomes of 40% higher than the highest standard annuity. For less serious lifestyle medical conditions such as high blood pressure, Cholesterol, smoking being overweight an enhanced annuity can still offer higher incomes than the conventional open market option annuity.