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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:  
annuity rates down 0.89%
Smoker rates:  
annuity rates down 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.

Annuity Rates Review September 2012
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Annuities to fall further with EU Gender Directive

Find out more:
gilt yields for September 2012

unisex rates to lower pensioner income
solvency 2 will lower annuity rates by 2014

Gilt yields increased by 25 basis points to 2.39% in September after the German court approved the bailout plan. The European Central Bank (ECB) put forward the bailout plan to buy unlimited amount of bonds from struggling countries along with the European Stability Mechanism (ESM) which was challenge by opponents claiming that it was illegal.

With the new unisex annuity rates soon to be introduced by the EU Gender Directive from December 2012 providers may be making moves now to reduce rates. Even though gilt yields ended the month higher annuities for standard, smoker and impaired rates all decreased. Overall 82% of annuities reduced with standard annuity rates lower by 0.89% which is less than last month. On the other hand smoker annuities are lower by 1.31% which is more than last month.

Fig 1 below shows the
annuities changes for the whole market and the proportion that have either increased, decreased or or did not change. It also shows the range increases or decreases of the annuity rates over 1 month ending September 2012:

Annuity Rates Changes
Increase No change Decrease
annuity rates increase   7%
annuity rates no change   11%
annuity rates decrease   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

Fig 1 above shows that 7% of annuities increased for a combination of standard and smoker rates. These increases were from 0.2% to 1.8% with the highest from standard rates for females aged 65 to 70.

The majority of annuities decreased although this was not as great as previous months as gilt yields increased. The largest percentage decrease was for smoker 100% joint life aged 60 with 2.3% and the largest monetary decrease was single females aged 70 to 75 and 50% joint life aged 75 decreasing by £127 per annum.

Equity markets were steady starting at 5,711 and ending at 5,742 reaching a high of 5,916 with a range of 174 points. This means so pensioners should not have experienced a significant change in their pension fund when purchasing an annuity during September.

What happened to rates during September

Fig 2 below shows for a fund of £100,000 the change in annuity rates for males, females and joint from age 55 to 75 with different annuity options such as level or escalating over 1 month ending September 2012:

Annuity Rate Changes - Standard
  Male * Female * 50% Joint
annuity rates down   1.06%
annuity rates down   0.24%
annuity rates down   0.93%
Level + 10 yr
100% joint **
annuity rates down   1.19%
annuity rates down   0.42%
annuity rates down   1.09%
3% escalation
annuity rates down   1.04%
annuity rates down   1.03%
annuity rates down   0.57%
Annuity Rate Changes - Smoker
  Male * Female * 50% Joint
annuity rates down   0.83%
annuity rates down   1.52%
annuity rates down   1.33%
Level + 10 yr
100% joint **
annuity rates down   0.94%
annuity rates down   1.67%
annuity rates down   1.55%
3% escalation
annuity rates down   1.21%
annuity rates down   1.73%
annuity rates down   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
annuity rates down   1.19%
annuity rates up   2.29%
annuity rates up   1.74%
3 months
annuity rates down   2.17%
annuity rates up   3.86%
annuity rates up   2.80%
6 months
annuity rates down   1.02%
annuity rates up   0.54%
annuity rates up   1.26%
Smoker Annuities - Change Expected
  August September October
1 month
annuity rates down   0.77%
annuity rates up   1.22%
annuity rates up   2.21%
3 months
annuity rates down   0.26%
annuity rates up   4.33%
annuity rates up   2.60%
6 months
annuity rates up   3.62%
annuity rates up   3.09%
annuity rates up   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.

Annuity Rates
  Age Single Joint  
  55 £4,574 £4,142  
  60 £4,961 £4,610  
  65 £5,691 £5,238  
  70 £6,478 £6,098  
£100,000 purchase, level rates, standard
Unisex rates and joint life basis
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