31 August 2012 last updated

Annuity Rates - August 2012

All time low levels have been reached by annuity rates although increases may now be possible Standard rates:   1.99% Smoker rates:   0.92% For the fourth 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 £56 pa in July to an income of £5,746 pa. Since June 2011 the annuity income for our benchmark example has reduced by £1,060 pa from a high of £6,806 pa or a fall of 15.5%. The recent decreases have gone beyond the falls in gilt yields which actually increased slightly by 3 basis points in August and annuity rates now could rise in the short term assuming yields remain at current levels or increase. Over a longer time period gilt yields have reduced from 3.56% in June 2011 to 2.07% today or 149 basis points and annuities should reduce by 14.9% suggesting they could fall by a further 2.1%.

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Annuity Rates Changes Increase No change Decrease   7%   4%   89% Increases of: 0.3% - 1.5%   Decreases of: 0.2% - 4.1%

Fig 1: Annuity rate changes for the whole market ending August 2012

Annuity Rate Changes - Standard   Male * Female * 50% Joint Level   1.73%   2.62%   1.79% Level + 10 yr 100% joint **   1.54%   2.58%   1.84% 3% escalation   1.89%   1.98%   1.96% Annuity Rate Changes - Smoker   Male * Female * 50% Joint Level   1.59%   0.79%   0.64% Level + 10 yr 100% joint **   1.21%   0.50%   0.07% 3% escalation   1.51%   0.70%   1.17%

Fig 2: Annuity rate changes for 1 month ending August 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 standard annuities based on a fund size of £100,000, level basis for males, and joint aged 75 and females aged 70 to 75. The fall in income was between £220 pa to £260 pa or from 2.6% to 4.1%.

For smokers based on a fund size of £100,000 standard annuities on a level basis the largest decrease was for male single life aged 70 with a decrease of £187 pa or 2.2% and there were are large range of decreases between £15-£140 pa for males, females and joint annuities. The largest increase was for 100% joint life aged 65 of £78 pa or 1.5%.

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   July August September 1 month   2.81%   1.19%   2.29% 3 months   1.41%   2.17%   3.86% 6 months   0.33%   1.02%   0.54% Smoker Annuities - Change Expected   May June July 1 month   3.96%   0.77%   1.22% 3 months   0.58%   0.26%   4.33% 6 months   4.29%   3.62%   3.09%

Fig 2: Annuity rate changes required to match gilt yields

Gilt yields increased slightly this month from 2.04% to 2.07% although providers have decreased annuity rates further than necessary and this suggests that standard annuity rates could increase by 2.29% and smoker annuities by 1.22% and possibly more in the medium term assuming gilt yields remain at current levels or increase.

Providers have reduced impaired annuity rates during August and this appears to be a theme 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.

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 2012.