Your IndustryNov 6 2014

Annuity rates in the near future

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Annuity rates determine the amount of income an annuity provider will guarantee in return for your client’s pension savings.

For example, in simple terms a 5 per cent annuity rate means that the annuity provider would provide you with 5 per cent of your pension fund as a guaranteed income each year for the rest of your life.

Each provider sets their own annuity rates. They are based on expectations of underlying elements such as interest rates, stock market performance and life expectancy.

Over recent times, even before the chancellor’s shock Budget announcement, Alistair McQueen, pensions manager at Aviva UK, says these elements have reduced annuity rates to relatively low levels.

He says it is very difficult to predict how these elements will move over time, however “an annuity provider should be incentivised to offer you a strong annuity rate in a desire to secure your business”.

Mr McQueen says: “The attraction of an annuity is that it offers you a guaranteed income for the rest of your life. It is a personal decision to judge if this guaranteed income represents good value for money.”

In truth, a study from the FCA before the radical overhaul was announced revealed what many had long suspected: the annuity market was not operatively effectively and was “disorderly”, with profitability for providers rising while rates were decreasing.

The future of annuity rates will depend upon the appetite from providers, says Richard Williams, director of The Annuity Bureau from JLT. However he says there is no reason to suggest that rates will not continue to track gilt yields as they have largely done since day one.

One aspect that could be impacted is the level of ‘mortality cross subsidy’ available through annuity rates.

Given the increased flexibility to access pension pots and recent announcements regarding the removal of the 55 per cent tax charge on pension assets on death, Mr Williams says annuities may be seen as a less attractive proposition to some people, and substantial falls in sales could see a reduction in this valuable annuity benefit.

But as large insurers invest a significant amount into fixed-interest securities and the flow of funds is likely to fall – at least in the short term - Mark Stopard, head of product development at Partnership, says we may well see higher long-term interest rates, which may eventually feed through into more favourable annuity pricing.

Mr Stopard says competition may also drive an increase in annuity rates for some customer demographics. For example, Mr Stopard says if providers see the older age group (75 plus) as being most valuable then they may improve their offering to attract these customers.