Competition in the annuity market has never been weaker, according to analysis from Moneyfacts, which found a lack of appetite among providers to compete for business contributing to record low annuity rates.
The average annual income from a level without guarantee standard annuity fell by 3.4 per cent, based on a £10,000 purchase price, during the second quarter of 2016.
Since then, rates have dropped even faster, with average annual annuity income falling by 6.3 per cent in the month following the outcome of the EU referendum and the subsequent drop in the gilt yields annuities are invested in.
As such, annuity rates are now at record lows, according to the research by Moneyfacts, declining by as much as 12 per cent since the start of the year.
Competition in the annuity sector has generally been on the wane since the government announced its plans for pension freedoms in March 2014, the price comparison site stated, with the resulting decline in sales making aggressive pricing near impossible.
There has also been a narrowing gap between the highest and lowest annuity rates on offer, further demonstrating the lack of competition afflicting the annuity market.
In the second quarter this year, the gap fell from 16.1 per cent to just 10.7 per cent. This has now fallen to just 9.2 per cent, the lowest level ever recorded by Moneyfacts.
Recent months have seen the gap between the most and least competitive annuities close significantly, due to market-leading rates being cut more heavily than those at the bottom.
| Average single life standard annuity Age 65 (£10K purchase price)
| Average single life enhanced annuity Age 65 (£10K purchase price)
|
Q2 2016 | -3.4% | -0.7% |
Since EU Referendum (23 June 2016) | -6.3% | -4.9% |
Since 1 Jan 2016 | -12% | -6.4% |
Figures show gross annual annuity payable monthly in advance. Figures based on an annuitant aged 65 buying a single life level without guarantee annuity | ||
Source: Moneyfacts Figures as at 25 July
Richard Eagling, head of pensions at Moneyfacts, said heavy gilt yield falls sparked by Brexit and the more onerous capital requirement of the new Solvency II rules are having a “dramatic and devastating” impact on annuity pricing.
“Faltering competition within the annuity market has compounded the situation,” he stated. “The severe fall in annuity rates in Q2 2016 and in July have left many retirees facing a conundrum: they still want a secure sustainable lifetime income but are reluctant to annuitise at a time of record low rates.”
At the end of June, Standard Life and Aviva cut their annuity rates by around 4 per cent and 2 per cent respectively, following a dramatic post-Brexit decline in gilt yields. A few days later, Canada Life became the third UK annuity provider to slash rates, after 10-year treasury gilt yields tumbled to below 1 per cent.
Allan Maxwell, chartered financial planner and director at Glasgow-based Corporate Benefits Consulting, said there are many factors which impact on annuity rates, however at the present time interest rates are likely to be the most important, as the Brexit vote means that interest rates are likely to stay lower for longer.
“Lower interest rates mean more expensive annuities,” he commented. “In theory, the lack of demand in the market should to lead to improved annuity rates, however a lot will depend on how providers view the relative profitability of annuities over other products they might be able to sell.”
ruth.gillbe@ft.com
