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29 April 2016 last updated

Enhanced annuities lower as providers merge to form new group

Enhanced annuity rates have reduced by up to 2.5% even when gilt yields are higher for the month as Just Retirement and Partnership Assurance merge to form a single group.

The £1.4 billion merger of the two specialist enhanced annuity providers was completed earlier this month and now called the Just Retirement Partnership Group (JRP Group), originally announced in August 2015.

Annuity sales had reduced 75% since George Osborne announced new pension freedoms starting in April 2015. Just Retirement had experienced a 56% fall in annuity sales and Partnership a 50% fall.

People at retirement have been opting for flexi-access drawdown rather than annuities although there has been a resurgence of interest in enhanced annuities during 2016.

During the month the group has reduced their annuities by up to 2.5% followed by other enhanced providers such as Liverpool Victoria and this is related to the market re-structuring with the merger of two leading rivals.

Enhanced annuities rates lower
  Providers of enhanced annuities have reduced their rates by up to 2.5% despite a rise in yields.
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Gilt yields rise ignored by providers

Annuity rates are mainly based on the 15-year gilt yields which briefly reached their all time low level of 1.68% in February. For the month of April yields have increased by 14 basis points from 1.96% to 2.10%. As a general rule this would result in an increase in annuity rates of 1.4%, however, enhanced rates are lower by up to 2.5%.

  Benchmark annuity rates and gilt yields
  Oct Nov Dec Jan Feb Mar Apr
Rate £5,828 £5,824 £5,578 £5,614 £5,633 £5,391 £5,311
Yield 2.23% 2.17% 2.29% 1.93% 1.92% 1.96% 2.10%

The above table shows how the standard annuity rates have reduced in the last six months based on our benchmark example of a person aged 65 years old with a fund of £100,000 buying a lifetime annuity on a single life, level basis.

In October 2015 the annuity was £5,828 pa reducing 8.8% to £5,311 pa whereas yields have reduced only 13 basis points. Annuity rates would be expected to be lower by 1.3% which would suggest an over correction has occurred since March this year.

The fall in the rate since October 2015 for our benchmark example of £517 pa would reduce the lifetime of the annuitant. Based on the Office of National Statistics (ONS) we would expect a male to live for 17.3 years and he will have £8,944 less over his lifetime. For a female she can expected to live for 20.4 years increasing her income by £10,485.

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Annuity Rates
  Age Single Joint  
  55 £3,947 £3,702  
  60 £4,391 £4,052  
  65 £5,098 £4,638  
  70 £6,055 £5,457  
£100,000 purchase, level rates, standard
Unisex rates and joint life basis
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