Annuity Rates: Another Nail in the Coffin

by | Sep 23, 2014

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If you think it’ll all be over for annuities next April when the pensions liberalisation comes in, the following probably won’t change your mind. But if you’re still watching the market, spare a thought for the poor devils who have to sell them.

New joint research from Investment Life and from the Moneyfacts comparison website  has shown that annuity rates experienced their worst monthly fall for three years during August 2014 – right at the moment when you might have expected the providers to be wary of disappointing potential buyers. But that’s the trouble with actuaries. The spreadsheet calls the tune.

Pensions Moneyfacts’ figures show that the average annual income from a typical standard annuity for a 65-year-old, based on a £50,000 pension pot, fell by 2.6% in August – meaning, it says, that the average income from a £50,000 pot fell from £2,874 to £2,797. Or £1,540 over a 20-year retirement.

 
 

More worrying is the fact that it brings the shrinkage since the start of the year to 3.2%. Yes, says Moneyfacts, enhanced annuities (which take illnesses and so forth into account) saw a much smaller reduction of 1.3% over the same eight months; but the last few months have seen enhanced annuity rates falling much more steeply than standard rates.

  Average Standard Annuity Average Enhanced Annuity
1 August 2014 £2,874 £3,390
1 September 2014 £2,797 £3,344
% Change -2.6% -1.3%
Annuity figures show gross annual annuity payable monthly in advance. Figures are based on a £50K purchase price for a level without guarantee annuity. (Source: Investment Life and Pensions Moneyfacts)

The authors say there are two main factors behind the fall in annuities. Firstly the major drop in 15-year gilt yields, a major influence on annuity rates, which are now at their lowest level since June 2013.

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