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   Annuities explained
  Annuity Rates Explained   "Personalise your annuity by changing or adding features"

You can personalise annuities to reflect your own circumstances by adding extra features. This could be to provide a pension income for your spouse, or an escalation element to protect the income against inflation. You can even decide the frequency of payment from monthly to annually, payable in advance or arrears.
  About annuities   Annuity rates outlook   Annuity protection
  Annuity charges   Added feature costs   Specialist advice
  Effect of inflation   12-month trend 2011   Future trends

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Annuity Rates Outlook
We follow the progress of our benchmark annuity rate for a person aged 65 with a fund for £100,000 buying an annuity on a single life, level basis. The benchmark example uses a central London postal code (other areas in the UK would have incomes up to 5% higher than those shown).

Find out more details:
monthly analysis of annuities and gilt yields


Below shows the annuity rates and gilt yields over the last six years to date:

Annuity Rates Chart Annuity Rates Chart
Read the latest annuity rates review to find out if this is the best time to buy an annuity.
   
Annuity Rates Changes Annuity Rates Changes
Find out about the latest changes in annuity rates and if they are rising or falling.
   
15-Year Gilt Yields 15-Year Gilt Yields
The 15-year gilt yields have a significant effect on annuity rates which we update daily.


About annuities
The rates you receive from pension annuities are based in part on index-linked gilts that provide an index-linked income and redemption values in the future for the providers. In the long term annuity rates are likely to continue to fall due to lower inflation and improved life expectancy. Inflation also has an effect on the value of money and this will erode the buying power of pension annuities over time.

With an open market option it is possible to counteract the effects of inflation by adding an escalation feature that increases the pension income over time. However, this would mean a lower starting income when compared to a standard (conventional) annuity. There are many other features that can be changed on an annuity such as adding a spouse's income or a guaranteed period of payment in the event of an early death of the annuitant. All these extra benefits have a cost that reduce the annuity income from the start.

At retirement the individual can use a money purchase fund, personal or company, to buy an annuity using an open market option to search for the highest pension annuity. Features can be added at this point such as escalation, a spouses's pension or frequency of payment. Once you have purchased an annuity it cannot be changed, so learn more about pension annuities, compare annuity rates and before making a decision at retirement, secure a personalised pension annuities quote for an accurate income for you and offering guaranteed rates.

If you are comparing our free annuity quote to the illustration you have received from the existing provider, please remember to make sure the annuity details are exactly the same. Any difference could mean our quote figures can be improved when compared like for like with your provider's illustration.


Added feature costs
The annuitant can add extra features to a pension annuity depending on their requirements. The following table shows the costs associated with a number of main features, assuming that the annuitant and spouse are 65 years old, the income is on a level annuity basis paid monthly in arrears, no guaranteed period included and is without proportion. The cost of the added features will reduce £1,000 of pension income per year by the stated amounts.

Cost per £1,000 of pension income
  Features
Female 65 Male 65 Joint 65
With proportion
£2 £2 £2
Advance payment
£6 £8 £5
Guaranteed for 5 years
£6 £9 £5
Guaranteed 10 years
£25 £37 £19
Survivors pension 50%
£64 £108 n/a
Survivors pension 66%
£77 £140 n/a
Survivors pension 100%
£100 £188 n/a
RPI escalation
£257 £229 £254
Escalation at 3%
£278 £250 £278
Escalation at 5%
£433 £396 £436
Annuity table - the annuity rate costs shown above are based on annuitant at the age of 65 and should be used as a guide only. For an annuity rate specific to your circumstances you should complete the free annuity quote.


For example, the cost to a female of adding a guaranteed period of 5 years will be £6, reducing her income from £1,000 per year to £994. For a male the cost would be £8, reducing his income from £1,000 per year to £992. This difference is due to the fact that male life expectancy or mortality is shorter than for a female and therefore represents a higher risk for claiming.

Also, for a female the cost of a 50% survivors pension is £77, reducing her income to £923 per year whereas for a male this is £140, reducing his income to £860. The difference is due to the fact that it is more likely a female will outlive her spouse and therefore the risk to the insurance company is higher where the annuitant is the male.


12-month trend 2014
For all annuitants retiring in January 2014 aged between 50 to 75 and purchasing single or joint life level pension annuities, they have seen a decrease in the income payable when compared to rates 12 months ago in January 2013.

The following tables show the latest conventional rates compared to last year (follow the link for smoker rates showing a 12-month trend). It is based on an original pension fund of £133,333 and after the tax free lump sum has been taken, £100,000 is used to purchase an annuity. The difference between the two years is shown in pounds sterling per annum. The percentage is the change from the annuity rate paid last year.

Standard, level annuity
Single Rate Change 50% Joint Rate Change
  55 Up £788 15.6%  
  60 Up £780 14.0%  
  65 Up £865 13.9%  
  70 Up £624 9.1%  
  75 Up £640 7.9%  
  55 Up £630 13.3%  
  60 Up £622 12.0%  
  65 Up £669 11.8%  
  70 Up £490 7.8%  
  75 Up £440 6.0%  
Annuity table - the annuity rate changes are based on £100,000 in May 2010 compared to May 2011. For annuities specific to your circumstances you should complete the free annuity quote.


KEY - Annuity Rates Changes
  Up Latest rates higher than 12 months ago
  Down Latest rates lower than 12 months ago
  £ Difference in pounds sterling (per annum)
  % Percentage change from 12 months ago
  nc No Change


Effect of inflation

The effect of inflation on a level annuity would be to reduced the buying power of this income in the future, thereby reducing the standard of living of the annuitant in today's money so an annuitant should consider protecting this using pension annuities with RPI escalation. Current inflation is between 1.5% and 3.0% and even this low level can significantly reduce the value of the annuity income, as the following table shows.


Future buying power of £1,000
Inflation 5 yrs 10 yrs 15 yrs 20 yrs 25 yrs
1.5% 928 861 800 742 689
3.0% 863 744 642 554 478
5.0% 784 614 481 377 295
8.0% 681 463 315 215 146


For example, for a 65 year old male with a single life annuity with a level income of £10,000 per year, a 3.0% rate of inflation will reduced the buying power of this money to £7,440 per year in real terms by the time he is 75 years old. If he lives to this age, the mortality statistics expect he can live for another 12 years, to 88 years of age. By then this income is going to be worth only £5,067 per year in real terms. If inflation rises above 3.0% on average, his income is going to be even lower.

However, the annuitant must remember that annuities with RPI escalation reduces the initial pension income received, so for a 65 year old male given 3.0% inflation it would take almost 11 years before the income matches the level annuity, or considerably longer, almost 20 years to match the cumulative income paid.


Annuity charges
By purchasing annuities through an open market option, the current pension fund provider may make an administrative charge. However, the extra income secured far outweighs such costs. The other consideration is what costs are there from the new provider of the pension annuity.

To a certain extent this is not a consideration because when an annuity is purchased for the highest possible income, the capital now belongs to the insurance company. In general, the insurance company take 4% from the capital and this represents a charge for administration and to cover the distribution costs.

The distribution cost include such things as advertising, direct sales force or an intermediary such as an independent financial adviser (IFA), for selling their products and this is accounted for in the annuity quotes provided. Typically this cost is between 1.0% and 1.5% of the purchase price of the annuity.

Nevertheless, the extra income secured by an open market option, taking into account of all the cost, can be as high as 30% compared to the offer made from the existing pension provider. Many people buying pension annuities direct are paying this charge on an execution only basis. This means that if it turns out the annuity is not appropriate, they have no option for complaint as they have effectively advised themselves.

Specialist advice from an IFA with protection provided by the Financial Services Authority (FSA) should be sought, as this will be paid for by the insurance company out of their distribution cost.


Annuity protection
There is always the concern that the insurance company which provides the annuitant with a pension income could become insolvent at some point in the future and what would happen to the payments. It is therefore very important that some research is conducted regarding the financial strength of the provider and this can be offered by an IFA.

However, there is protection provided in legislation, and in particular the original protection for a policyholder was introduced in the Policyholder Protection Act 1975 (PPA 75) where the policyholder protection board (PPB) acts as an industry funded safety net when a UK insurance company becomes insolvent.

Under the Policyholder Protection Act 1997 (PPA 97) this protection covers a purchased life annuity and pension annuity. In the first instance the PPB must initially seek to transfer the ongoing policies of the insolvent insurer to another company. The PPB must ensure the policyholder will receive 90% of the future benefits from the annuity. The provision of the PPA 1997 has been incorporated in the FSA, applying from midnight on 30 November 2001 and is called the Financial Services Compensation Scheme (FSCS).


Specialist advice
Two thirds of people in the UK are retiring today only to accept a poor annuity income from their pension provider, when an open market option could have increased this income by up to 30%, worth thousands of pounds every year for the rest of their lives, simply by asking for the best annuity rates. It may be that other options such as pension drawdown or phased retirement would be more suitable than an annuity.

It is very important to purchase the right pension income because once bought pension annuities cannot be switched to another annuity provider, cannot be changed to a different type of annuity and cannot be altered in any way for the rest of the annuitant's life. Therefore if the annuitant could benefit from an enhanced annuity or impaired annuity, this option must be explored before buying the annuity.

Specialist advice does not have to cost the annuitant more money. The distribution costs associated with selling an annuity by an insurance company cover the cost of advertising or advice and amount to between 1.0% and 1.5% of the annuity purchase price. However, individuals that buy direct pay for this cost yet the pension annuity is sold on an execution only basis, passing on the risk that the annuity may not be suitable back onto the customer.

By receiving specialist advice from an IFA with an annuity and pension bureau, the annuitant benefits from the consumer protection provided by the FSA if the advice given was not appropriate. If you are unsure of the features and options offered with an annuity, or would like advice on alternatives to pension annuities such as income drawdown, phased retirement, With Profits annuities of even temporary pension annuities, you could benefit from advice specific to your circumstances and attitude to investment risk.


Future trends
Current annuity rates are at the lowest levels for the past 40 years. Some people may think that this means annuity rates are more likely to rise in the future. However, the pension income paid from pension annuity is dependent on a number of economic factors, and these suggest that annuity rates are likely to remain where they are today or fall in the future.

The long term rate of inflation in the UK is now under control between 1.5% and 3.0%. This reduces the yields from investments and gilts which are purchased by the insurance companies to pay annuity income to annuitants. The UK Government uses the gilt market to raise money to increase public expenditure. It does this by offering attractive rates of interest, but currently this money is not required.

The market expectation is that the UK will eventually joint the Euro. As the interest rates in Europe are lower than in the UK, this means that UK interest rates must fall to match that of Europe. The markets have already reflected this expectation in interest rates, so when the UK does join the fall in income to annuitant is not going to be significant.

In the past there was only a single annuity market where the early death of an annuitant resulted in a mortality profit for the other annuity holders. However, these annuitants are now selecting against the insurance companies by opting for an enhanced or impaired annuity, phased retirement or pension drawdown. This has the effect of reducing the mortality profit and hence the annuity rates.

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Annuity Rates
Single
  55 £4,933  
  60 £5,435  
  65 £6,093  
  70 £6,930  
Joint
  55 £4,666  
  60 £5,113  
  65 £5,612  
  70 £6,273  
£100,000 purchase, level and standard rates
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