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22 August 2014 last updated |
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Standard annuities fall by up to 3.2% as yields fail to improve |
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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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Hodge Life reduce their annuity rates after gilt yields fall as investors seek safe havens |
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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.
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Annuity types and fall in rates |
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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 |
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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.
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Benchmark annuity rates and gilt yields |
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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% |
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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.
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Age |
Single |
Joint |
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55 |
£6,132 |
£5,784 |
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60 |
£6,532 |
£6,234 |
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65 |
£7,247 |
£6,808 |
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70 |
£8,170 |
£7,616 |
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£100,000 purchase, level rates, standard
Unisex rates and joint life basis |
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