A tough new code of conduct from the Association of British Insurers covering the insurance industry will force firms to encourage all retirees to shop around and highlight the potential benefits of enhanced annuities even if they do not offer them.
According to Stephen Lowe, director of external affairs at Just Retirement, more than 60 per cent of people could qualify for an enhanced annuity, yet ABI statistics show only “a negligible number of clients securing their annuity from their existing pension provider achieve this outcome”.
It is thought the changes will mean that some firms may drop out of the market and more firms may introduce annuities underwriting.
The European Commission’s Gender Directive, which came into effect from December 21st 2012, means providers can no longer offer different rates to men and women.
“Previously women received lower rates on the basis that they lived longer,” says Dean Mirfin, group director at Key Retirement Solutions. “All rates are now unisex with the effect that women are receiving in general higher rates and men generally slightly lower rates.”
Some providers have levelled up by raising female rates to male rates making it vital to shop around.
Alan Higham, chairman of Annuity Direct, notes that rates for men dropped by around 2 per cent and rose by slightly more for females at typical retirement ages as a result.
Advisers need to keep an eye on the regulatory news, as other regulations are on the way including the EU’s Solvency II directive, which affects insurance companies and the capital they have to hold in order to prove they can withstand shocks. This is expected to impact on payouts to clients and it has been estimated pension incomes could fall up to 20 per cent if annuity rates need to be cut.
“There is still uncertainty on the extent to which EU regulations on insurance solvency might require more capital to be held as security for guaranteed annuities,” adds Mr Higham.
He also believes the Bank of England’s monetary policy on quantitative easing has significantly affected the market for long-term gilt yields.
“Prior to QE stating in 2008, gilts yielded around 5% and annuities paid 7.5% for a single man at age 65. By the end of 2012, gilt yields were just under 3% and annuity rates were closer to 5.5%.
“Once QE starts to unwind then it is expected that gilt yields will rise and with it annuity rates,” he concludes.”
