Annuity rates on route to lowest level in 3 years

Annuity rates on route to lowest level in 3 years

Annuity income rates have shown a decline in Q2 with the average standard annuity income falling to its lowest level since September 2016, after the EU referendum result.

According to Moneyfacts' UK personal pension trends treasury report, out today (July 24), income from an average standard level without guarantee annuity has fallen by 5.5 per cent since the beginning of 2019 to a rate of £457.79.

This was based on income for a 65-year old with a £10,000 pension pot. At the higher purchase price of £50,000, the average standard annuity income fell by 3.8 per cent.

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This latest fall means that annuity income is on track for it largest annual decrease since 2014, when the pension freedom reforms were announced.

The only period in which annuity rates have been lower was during the four months between August 2016 and December 2016 immediately following the EU referendum result. In September of that year they hit their lowest point at £443.95.

Enhanced annuity income fell 4.5 per cent during the second quarter of 2019 and has decreased by between 4.9 per cent and 6.1 per cent (depending upon the purchase price) since the beginning of the year. It now stands at £493.84 for the above-mentioned £10,000 pot.

The falls were primarily due to a decline in gilt yields, according to the report.

Andrew Tully, technical director at Canada Life said: “Annuity rates are driven to a large degree by the yields available from gilts. Until we see an increase in yields, annuity rates are unlikely to shift significantly upwards. 

“However rates do fluctuate so it is worth shopping around to find the best rate, making sure your health and lifestyle are taken into account, and possibly phase the purchase of the annuity to avoid locking into a rate on one day.”

But Adrian Boulding, chief innovation officer at Spire Platform Solutions, said the equity release market played an important role in the lowering of income rates.

Mr Boulding told FTAdviser: “There has been a change in the equity release market over the last year which has played a role in lowering annuity income rates.

“The Financial Conduct Authority (FCA) asked equity release providers to increase the level of reserves they hold in the unlikely event that a pensioner's mortgage is more than the house value. This damaged the profitability of the equity release market.

“This is relevant as many major insurers invest a large amount of the money they get from annuities into equity release mortgages, which helps to explain why the level of annuity income has fallen.”

Despite the fall in rates, Mr Tully said annuities continue to be valued by clients who want the certainty of a guaranteed income.

He said: “While sales of annuities fell significantly after the introduction of the pension freedoms in 2015, sales since then have been fairly constant, demonstrating that many people continue to value the certainty which a guaranteed lifetime income provides. 

“People may also want to mix and match annuity and drawdown, providing the certainty of a lifetime income alongside the flexibility of drawdown."