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22 August 2014 last updated
Standard annuities fall by up to 3.2% as yields fail to improve

Standard annuities from Hodge Life have been reduced by up to 3.2% and as they are currently the leading provider this has had a significant impact in the annuity market.

The recent fall in the 15-year gilt yields from 3.21% in July to a low of 2.82% in August has been due to escalating conflicts in the Ukraine and Middle East forcing investors to seek safe havens.

Canada Life, Aviva and Legal & General had already reduced their rates leaving Hodge Life at the top across the board for annuities in the last few months.

Rates are mainly based on the 15-year gilt yields and the changes in the market in July and August suggested that annuity rates could reduce by 3.12%.

Hodge Life have made significant reductions for both single and joint life rates reducing these by between £96 pa to £146 pa for single and joint life annuities based on a £100,000 fund size resulting in decreases from 1.9% to 3.2%.

 
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Annuities hit with significant falls

Annuities are lower across the board with the largest reduction for 100% joint life rates aged 55 with 3.2% where Hodge Life have dominated over the competition with large margins. The following table shows examples of the changes.

  Annuity types and fall in rates
Type July August Fall %
Single age 55 £4,951 £4,855 1.9
Single age 65 £6,135 £5,989 2.3
50% joint age 65 £5,662 £5,515 2.6
100% joint age 65 £5,335 £5,188 2.7
100% joint age 55 £4,487 £4,341 3.2


For older annuitants the changes were not as great at 1.6% fall for a single life and 1.8% for 50% joint life for those aged 75. Our benchmark example below compares the change in yields with annuities over the past seven months.

  Benchmark annuity rates and gilt yields
  Feb Mar Apr May Jun Jul Aug
Rate £6,037 £6,093 £6,080 £6,078 £6,143 £6,135 £5,989
Yield 3.17% 3.17% 3.16% 3.06% 3.14% 3.05% 2.86%


For our benchmark example of a person with £100,000 buying an annuity on a single life, level basis has seen income reduce by £146 pa. In terms of lifetime income, the Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £2,525 more over his lifetime. For a female she can expected to live for 20.4 years increasing her income by £2,976.

Annuities can rise with interest rates

Although annuity rates are falling now, an increase in interest rates will mean annuities will increase as well. In general a 1% rise in interest rates would see annuities higher by 10%.

The Bank of England is unlikely to increase interest rates this year as they have admitted there is not enough evidence the economy is strong enough to support a rise. Falling unemployment and record employment with weak wage growth as well as spare capacity in the economy at 1% of GDP is preventing the Bank from making any changes. Interest rates have remained at 0.5% since 2009 and may remain at this level until spring 2015.

Ideally people should wait for higher interest rates, however, this may take more than a year to see significant benefits in terms of annuity rates. It may not be possible for people to wait a year or more for income.

It is possible to take your tax free lump using a fixed term annuity for one year or more allowing time for interest rates to improve. This route would provide an income selected by you and a guaranteed maturity amount at the end of the term.

An alternative would be pension drawdown now available even for smaller funds of £30,000 to £100,000 and this option would allow greater income flexibility than the fixed term plan.

News related stories:
Best annuity rates could fall 3% as gilt yield market remains low
Enhanced annuities fall as Ukraine crisis sends yields to new low
Pension annuity income threat as FTSE and yields fall on latest data
Enhanced annuities fall as Bank of England resist interest rate rise
Related internet links:
Guardian - Bank of England backs away from higher interest rates
Annuity Rates
  Age Single Joint  
  55 £4,066 £3,782  
  60 £4,544 £4,240  
  65 £5,246 £4,794  
  70 £6,045 £5,433  
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