PensionsJul 15 2014

MGM data reveals polarisation of annuity market

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ByPeter Walker

Post-Budget, two distinct markets for annuities are emerging, with, for the first time, prices going in opposite directions for standard and enhanced rates, data from MGM Advantage has revealed.

Its latest annuity index has revealed that the gulf in annuity rates between the top enhanced rate and bottom standard rate is 30 per cent.

The index also showed that the average annuity rate has fallen in the second quarter of 2014 by 0.72 per cent, while the average enhanced rate fell by 1.64 per cent.

Aston Goodey, sales and marketing director at MGM Advantage, said that the data shows it pays to shop around when looking for retirement income.

He said: “This divergence in rate could be down to any number of factors, including the different types of assets providers use to back their books for both standard and enhanced products, as well as tactical pricing decisions.”

Mr Goodey called this a ‘tricky time’ for advisers and their clients, wondering what to do following chancellor George Osborne’s Budget promise that ‘no one will have to buy an annuity’.

He said that the industry needs to get back to basics and understand what annuities can provide to clients.

Mr Goodey said: “If you are looking for a product to provide a retirement income for life, then an annuity is in the unique position of being able to provide 100 per cent security for that income. Put simply, no other financial product is able to provide insurance of outliving your retirement savings.

“We know that for many people the freedom and access available from next year will be hugely appealing, but, if your objective is to convert pension savings into retirement income, then an annuity is still the product with a guarantee attached that it will continue to pay income however long you live.”

As for future annuity rates, the light at the end of the tunnel was the positive impact of future increases in interest rates and subsequent impact on gilt yields, which should help to push rates up according to MGM Advantage.

Mr Goodey said: “However, the Budget changes these dynamics considerably. When demand for product falls, then prices tend to rise. We might also see the type of people who traditionally bought annuities change.

“People with smaller pots may take the money as cash, while people with longer life expectancy might secure an income through an annuity. The net effect on the annuity pool could be to put further pressure on rates. Although we haven’t felt the full effect of the changing market dynamics, annuity rates are likely to flatline for a while yet.”