Annuity rates lower than a year ago

Our benchmark example for a 65 year old with a fund of £100,000 buying a lifetime annuity on a single life, level basis would receive £6,191 pa last month. After Just Retirement lowered their rates, this has reduced by £242 pa or 4.30% to £5,191 pa.

In the middle of December 2015 the 15-year gilt yields were as high as 2.30% and a month later reached the all time low of 1.68% before recovering to 1.77%.

Fig 1: Chart comparing annuity rates and 15-year gilt yields

Annuity rates are mainly based on the movement of the 15-year gilt yields. From the above chart the yields have improved and are now at 1.95%. The latest fall rates mean the benchmark annuity is 1.71% lower than a year ago, although more in-line with yields over this period of time.

For the benchmark example in terms of lifetime income, the Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £4,186 less over his lifetime. For a female she can expected to live for 20.4 years increasing her income by £4,936.

Alternatives to annuities

Annuity rates would recover with a rise in gilt yields and interest rates at some point in the future.

An alternative would be to consider a fixed term annuity allowing you to select an income and term until annuities can recover. At the end of the term you would receive a guaranteed maturity amount and can consider all options again such as an annuity from any provider, flexi-access drawdown, taking the fund as cash less tax.

Also popular is flexi-access drawdown allowing you to take your tax free lump sum now and leave the remaining fund invested, take an income, a lump sum or even contribute to the fund.