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21 January 2015 last updated

Impaired annuities down 4.6% as yield pressure builds on providers

Providers of impaired annuities have reduced their rates by up to 4.6% following a 28 basis point fall in gilt yields this month and by 20 basis point last month as investors buy government bonds and gilts.

Leading impaired annuity providers have reduced their pension rates with Liverpool Victoria by 4.6% and MGM Advantage 4.3% lower.

Other providers such as Just Retirement and Partnership Assurance have also reduced their rates by smaller amounts of between 1.0% to 2.0%.

Providers have also been adjusting their rates in relation to medical conditions with some more heavily reduced than others. This is a common practice to balance risk
if too much business is received for a particular condition.

As annuity rates follow the 15-year gilt yields providers have been under increasing pressure in recent months as yields tumble to all time low levels. Since July 2013 yields have reduced by 118 basis points which will translate to a 11.8% fall in annuities.

Impaired annuities 4.6% lower
  Providers have reacted to falling gilt yields reducing impaired annuities by as much as 4.6%
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Standard rates reduce rapidly following yields

Standard annuity rates have been slow to react to the fall in gilt yields reducing only 3.8% in the four months from July to November last year compared to yields down 70 basis points. Since then in the last two months rates have reduced by 4.2% and yields by 48 basis points indicating providers have accelerated their decreases.

  Benchmark annuity rates and gilt yields
  Jul Aug Sep Oct Nov Dec Jan
Rate £6,135 £5,987 £5,948 £5,906 £5,900 £5,755 £5,650
Yield 3.05% 2.70% 2.78% 2.64% 2.35% 2.15% 1.87%

The above table shows 15-year gilt yields are lower by 118 basis points since July 2013 and annuity rates using our benchmark example down by 7.9%. This suggests another 3.9% reduction is possible.

Six months ago our benchmark example for a person aged 65 with a fund of £100,000 could have bought an income on a single life, level annuity of £6,135 pa. Now this has reduced by £485 pa to £5,650 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 £8,390 less over his lifetime. For a female she can expected to live for 20.4 years decreasing her lifetime income by £9,894.

ECB stimulus could push rates lower

The falling oil prices are lowering prices by 0.2% in the year sending the Eurozone into deflation. This has increased pressure on the European Central Bank (ECB) to start quantitative easing.

Estimates are current for a €1.1 trillion stimulus programme over the next few years to keep the Eurozone out of deflation. This would average about €50 billion a month of bond buying following the actions taken in previous years by the Bank of England with £375 billion and the Federal Reserve with £2.9 trillion.

This has sent the euro down sharply as well as bond yields in the Eurozone although the equity markets have increased. The use of quantitative easing buying bonds releases investor funds which are used to buy higher yielding investments such as equities and markets may be buoyant following the start of any stimulus programme.

New pension rules from April

For people requiring an income there may be other options to consider. From April 2015 the government's new pension rules will mean it is not necessary to purchase an annuity.

Providers are expected to launch new products offering greater access to funds although there are options available now using a either flexible drawdown or a fixed term plan.

The flexible drawdown gives the greatest flexibility to draw income on a monthly basis or as single payments while remaining in the tax efficient environment of pensions. All options remain in the future such as annuity or taking the fund as cash less marginal rate tax.

A fixed term plan a very low risk option with terms for one year or more and an income selected by you. A guaranteed maturity amount ia payable at the end of the term and this is known before the plan is taken out.

With annuity rates at an all time low and likely to decrease further other options may allow the market to recover with higher income from an annuity in time.

News related stories:
Annuity rates fall 4.2% as 15-year gilt yields reach an all time low
Annuity income now 10% lower after falls in FTSE index and gilt yields
Annuity rates fall 2.3% as yields lower on Eurozone deflation crisis
Annuities to fall when ECB's €1 trillion stimulus plan starts
Related internet links:
Telegraph - ECB ready to start €1.1 trillion of stimulus
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