Pensions  

2016 set to become ‘worst ever year’ for annuities

2016 set to become ‘worst ever year’ for annuities

This year is on track to become the worst on record for annuity income, with rates already down around 15 per cent, according to figures compiled by comparison site Moneyfacts.

With three months left of the year to go, the fall in rates on an £10,000 annuity for a 65-year-old man was 14.8 per cent, already three percentage points greater than the 2012 fall, previously the worst year for annuity income.

For annuities with a £50,000 purchase price, the fall was even higher, at 15 per cent.

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Both figures are based on a benchmark annuity, one a a standard level without guarantee.

While annuity rates could pick up in the remaining three months of the year, Moneyfacts predicted it was “unlikely that the current economic environment will facilitate a strong enough recovery” to bring it below the 11.5 per cent fall seen in 2012.

Richard Eagling, head of pensions at Moneyfacts, said 2016 had been “a truly awful year for annuity rates”.

“This is particularly disappointing as the stock market volatility that we are experiencing has re-emphasised the importance of a secure lifetime income for many retirees,” he said.

“Unfortunately, record low gilt yields following the EU referendum result, the impact of Solvency II legislation and a significant weakening of competition in the annuity market have all exerted considerable downward pressure on annuity rates during 2016.”

Following the vote to leave the EU in June, 10-year gilt yields plunged to record lows, dipping well below the 1 per cent mark for the first time. In the last month, however, they have recovered somewhat.

On Wednesday (14 September) they were within 8 basis points of 1 per cent (0.92 per cent), and apparently on an upward trend.

Most annuity providers responded to the post-Brexit plummet in gilt yields by lowering their rates. Standard Life, for example, cut its rates by around 4 per cent.

Below are the annual changes in annutiy rates for the last 11 years, provided by Moneyfacts.

Calendar Year

Average annual change in annuity income (Figures based on a male aged 65 purchasing a standard level without guarantee annuity)

20061.3%
20074.4%
2008-2.2%
2009-8.7%
2010-2.7%
2011-8.4%
2012-11.5%
20139.1%
2014-5.7%
2015-3.1%
2016-14.8%
Source: Source: Investment Life and Pensions Moneyfacts