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14 September 2012 last updated |
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Annuity rates 5% increase possible but providers resist |
15-year gilt yields rise to 2.39% the highest point for three months with annuity rates now in a position to increase 5% if providers can break their downward cycle.
Annuity rates are mainly based on the 15-year gilt yields and these have increased by 15 basis points from 2.24% to 2.39%. In June 2011 gilt yields were as high as 3.98% and with the rapid deterioration of the Eurozone debt crisis the yields have reduced to an all time low of 2.02% on 2 August this year.
Since the beginning os September yields have increased by 32 basis points from 2.07% to 2.39% and as a general rule this would translate to a 3.2% increase in pension annuities. However, annuity rates were already lower than the fall in yields by the end of August by some 2% which means the gap between rates and yields is now over 5% and it would seem providers across the board continue to pursue a rate reduction strategy.
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Annuities poor value for pensioners
The lifetime pension annuity has reduced considerable in the past four years.
For example, in July 2008 a male aged 65 with a fund of £100,000 could purchase an annuity on a single life level basis with an income of £7,908 pa and today this has reduced by £2,162 pa or 27.3% to only £5,746 pa. According to the Office of National Statistics (ONS) his life expectancy is 17.8 years and over his lifetime the income he could expect for his £100,000 in July 2008 would have been £140,762. This has now reduced by £38,483 to only £102,279 just slightly more than the original fund value.
Even though gilt yields have increased over the past two months providers continue to reduce annuity rates and today standard annuities could increase by 5.5%, smoker annuities by 4.4% and impaired annuity rates by 7.0%. Providers of impaired providers have been particularly aggressive at reducing their rates with Just Retirement and Liverpool Victoria reducing their rates at the beginning of September by up to 2.5%.
Future threats to annuity rates
There are two significant events in the future that will decrease UK annuities as a result of European Union Directives relating to Unisex pricing for annuities in December 2012 and Solvency II originally in January 2013 but extended to January 2014. Unisex rates will decrease male and joint rates by about 4.2% and an increase of female rates by up to 2.4%. Solvency II is a requirement for providers to retain greater capital in order to protect the consumer and paradoxically will cost the consumer of annuities up to 8% in the income they will receive.
It is difficult to say if the recent reluctance of providers to match gilt yields is due to the above factors, however, the difference in gilt yields and annuity rates is greater over the medium term of three months which suggests a longer term strategy by the providers is developing.
Pensioners can receive enhanced annuity income
Although annuities are poor value to pensioners, they can make the most of the situation. If they suffer from a lifestyle medical condition
such as high blood pressure, Cholesterol, are a smoker or are overweight up to 18% more income can be generated from an enhanced annuity than the standard open market option. Serious health conditions such as diabetes, heart conditions or cancer could pay 40% higher incomes than the highest standard annuity by using an impaired annuity.
For people in good health an alternative would be investment backed with profits annuities offering up to 30% higher initial incomes than the standard annuity. Due to there being a higher risk of the income going down over time pensioners should have other pension plans or a final salary pension. Even so the income is smoothed removing the excesses of volatility experienced from equity funds.
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Age |
Single |
Joint |
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55 |
£6,361 |
£5,898 |
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60 |
£6,842 |
£6,244 |
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65 |
£7,474 |
£6,843 |
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70 |
£8,405 |
£7,660 |
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£100,000 purchase, level rates, standard
Unisex rates and joint life basis |
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