30 September 2012 last updated

Annuity Rates - September 2012 review

Despite an increase in gilt yields, new record lows have been reached by annuity rates with the EU Gender Directive about to send rates lower Standard rates:   0.89% Smoker rates:   1.31% For the fifth consecutive month annuity rates have decreased to a new all time low. Our benchmark annuity for a a 65 year old male on a level single life basis reduced £82 pa in September to an income of £5,664 pa. Gilt yields reached a high point for the month of 2.39 before ending the month at 2.16% an increased by 7 basis points in September and this would usually mean annuities would increase by 0.7%. However, annuity rates continue to decrease and in December 2012 the EU Gender Directive is likely to decrease rates further.

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Annuity Rates Changes Increase No change Decrease   7%   11%   82% Increases of: 0.2% - 1.8%   Decreases of: 0.2% - 2.3%

Fig 1: Annuity rate changes for the whole market for September 2012

Annuity Rate Changes - Standard   Male * Female * 50% Joint Level   1.06%   0.24%   0.93% Level + 10 yr 100% joint **   1.19%   0.42%   1.09% 3% escalation   1.04%   1.03%   0.57% Annuity Rate Changes - Smoker   Male * Female * 50% Joint Level   0.83%   1.52%   1.33% Level + 10 yr 100% joint **   0.94%   1.67%   1.55% 3% escalation   1.21%   1.73%   1.02%

Fig 2: Annuity rate changes for 1 month ending September 2012

* Male and female on a single life basis only

** Joint life option is level, 100% spouse benefit and no guarantee

The above table shows the average changes for level, level plus 10 year guarantee and 3% escalation for males, females and joint life annuitants between the ages of 55 and 75.

The largest reductions in pension annuity income were from smoker annuities based on a fund size of £100,000 with similar decreases for males, females and joint life. The largest fall in income was between £100 pa to £127 pa which is less than last month.

For standard annuities based on a fund size of £100,000 the decreases were again across the board for males, females and joint between ages of 55 and 70 with the majority of rates for aged 75 remaining unchanged.

Annuity rates change to match gilt yields

Annuity rates are based on the 15-year gilt yields which are primarily used to secure the income for pension annuities. Fig 3 below compares the difference between annuity rates and gilt yields showing the direction annuities need to move and the percentage amount to match gilt yields. It shows the difference when compared over the last 1, 3 and 6 months.

Standard Annuities - Change Expected   August September October 1 month   1.19%   2.29%   1.74% 3 months   2.17%   3.86%   2.80% 6 months   1.02%   0.54%   1.26% Smoker Annuities - Change Expected   August September October 1 month   0.77%   1.22%   2.21% 3 months   0.26%   4.33%   2.60% 6 months   3.62%   3.09%   2.21%

Fig 2: Annuity rate changes required to match gilt yields

Gilt yields increased this month from 2.07% to 2.16% and were as high as 2.39%. Providers have decreased annuity rates further than expected and this suggests that standard annuity rates could increase by 1.74% and smoker annuities by 2.21% although the EU Gender Directive may be influencing the pricing of annuities. All providers have been reducing annuity rates aggressively and this position will benefit their profit margins while pensioners can expect poorer value for money than expected at this time. For the latest updates see Annuity Rates Review.

Providers have reduced impaired annuity rates during September and this theme continues in the market as they follow each other with lower rates. In particular market leaders such as Just Retirement, Liverpool Victoria and Partnership have reduced rates and have had very little margin for any improvements as with last month.