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17 December 2012 last updated
Impaired annuity rates decreased 8% by providers to record lows

Providers of impaired annuities have reduced rates by up to 8% for male pensioners reaching an all time low as the new EU Gender Directive approaches even though gilt yields have significantly improved in December.

Annuity rates are primarily based on the 15-year gilt yields which reached an all time low of 2.02% in August 2012. Since then gilt yields have increased are are currently at 2.37%, however, annuities have continued to decrease as the the EU Gender Directive introduces unisex rates.

This may be due to providers attempting to avoid volatility in pricing which could impact on their profitability and also the larger than usual annuity applications as pensioner beat the deadline of 21 December.

As a result providers have reduced their prices and in particular impaired annuity rates are lower by up to 8% with some medical conditions such as high blood pressure not better than the highest standard annuities.

Impaired annuity rates decrease
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Annuity rates fall as demand increases

The gender neutral rates have increase the demand from pensioners to set-up their annuities before the deadline with impaired health providers
stretched to the limit of their administrative capacity. This has meant that Liverpool Victoria, Just Retirement and Partnership Assurance have entered a downward pricing cycle to limit the volume of new business.

Providers are also understaffed at the end of December as employees rush to use their holiday time that would expire at the end of the year. Combined with the additional demand on resources from the Retail Distribution Review (RDR) introduced from January 2013 the result is lower impaired annuity rates across the board.

As a general guide UK annuities would increase or decrease based on the movement of the 15-year gilt yields and these have increased by 14 basis points this month suggesting annuities should increase by 1.4%. Since August 2012 gilt yields have increased by 35 basis points yet standard annuity rates have reduced by 2.58% and smoker rates by 4.55%. This would suggest that on average standard rates could increase by 6% and smoker rates by 8%.

Pensioners significantly worse off than expected

Pensioners have therefore experienced significant decreases in value for their impaired annuity purchase. For example, a 69 year old male with a fund of £100,000 buying an annuity on a single life, level basis suffering from high blood pressure, Cholesterol, heart attack and angioplasty could receive an income of £8,460 pa and this has reduced by £500 pa to £7,960 pa.

Looking at standard annuity rates, at the end of August a 60 year old male with a fund of £100,000 on a single life, level basis could have purchased an annuity of £5,223 pa and this has reduced by 3.1% or £163 pa to an all time low of £5,060 pa. Gilt yields have increased by 35 basis points so we would have expected the rate to increase to £5,405 pa which means this pensioner will receive £345 pa less. Over his lifetime the Office of National Statistics (ONS) would expect him to live 21.55 years so this discrepancy will mean £7,434 less income.

For a smoker on the same basis as shown above, the pension annuity at the end of August would be £5,942 pa and has now reduced to an all time low of £5,670 pa when we would expect an increase to £6,150 pa based on the higher 15-year gilt yields resulting in a difference of £480 pa or an increase required of 8.4%.

News related stories:
Impaired annuities up 3.5% for second time by Just Retirement
Impaired annuity rates increase by 2.5% from Just Retirement
Highest annuity rates reduced 2% means lower pensioner income
Impaired annuity providers rates by 2% ahead of EU Gender Directive
Impaired annuity rates have been reduced up to 2% as gilt yields fall
Standard annuity rates now 1.5% lower income for pensioners
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