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31 August 2012 last updated
Annuity rates decrease even as gilt yields remain unchanged

Standard annuity rates have been reduced by providers with older females particularly worse off despite gilt yields remaining unchanged.

Annuity rates have ended the month with another decrease from Canada Life the current market leader in standard UK annuities for older annuitants aged 70 to 75 for males, females and joint lives.

The decrease was significant averaging 2.5% and follows earlier decreases of annuity rates from Canada Life and Legal & General on 17 August. For more details see annuity rates August review with full information of changes.

For August pension annuities for older females have reduced by up to 4.1% with significant falls in lifetime income compared to males. The recent decreases have gone beyond the falls in the 15-year gilt yields for which annuity rates are primarily based and suggests there is scope for increases in rates should yields remain at current levels or increase in September.

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Providers profit at pensioners expense

Providers have taken advantage of low gilt yields and market uncertainty and reduced annuity rates further than necessary and this will increase their profitability. Providers tend to follow trends and as all providers have been reducing their rates there is not much appetite to offer high rates resulting in a downward cycle. As a result pensioners retiring are suffering from lower than expected income at retirement.

Gilt yields have actually increased slightly in August from 2.04% to 2.07% and have reached a high of 2.27% during the month. Standard annuity rates have decreased by 1.99% on average and smoker annuities decreased by 0.92% with some pension annuity rates falling by up to 4.10%. For the latest updates see Annuity Rates Review.

Lifetime income reduces more for older females

As an example based on a fund of £100,000 the largest monetary decrease was for a male aged 75 single life level basis with a reduction of £260 pa which will reduce his pension annuity income over his lifetime by £2,834. The highest decrease for females was with the same size fund and features but aged 70 with a fall of £259 pa, however, over her life the decrease is greater as she will live longer and her lifetime income will reduce by £4,252. In comparison males aged 70 had a small decrease of £64 pa reducing their lifetime income by only £908.

Annuities have been reduced further than the fall in gilt yields and means providers have room to increase rates in the future if confidence returns to the market. The lack of confidence is due to the significant fall in the 15-year gilt yields since April 2012 by 60 basis points from 2.67% to the current level of 2.07%.

Based on the current position to match the change in gilt yields annuity rates will need to increase. For standard annuities this would be a rise of 2.29% based on the recent short term changes and for smoker annuities a smaller rise of 1.22%. Providers may be reluctant to increase annuity rates so soon after reducing them so it may be some time before one of them takes the initiative and the rest will then follow.

Pensioners can receive higher incomes

Even though annuity income is falling, pensioners in good health can consider an investment backed or with profits annuity offering 30% higher initial incomes than a standard annuity. These are a slightly higher risk although the income has a guaranteed minimum income and is smoothed over time reducing the volatility. These annuities are more suitable if pensioners have other sources of income such as two or more personal pension funds or a final salary pension.

Every pensioner that has medical conditions such as high blood pressure, Cholesterol, or smokes ten or more cigarettes per day or are overweight could receive 18% higher income with an enhanced annuity. With more serious conditions such as diabetes, heart conditions or cancer an impaired annuity can offer up to 40% more income.

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