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Annuities: from bad to ugly

Annuities: from bad to ugly

Annuity rates are already bad - but they are going to get worse by the end of the year. So if you want to buy an annuity you may need to buy one sooner rather than later. If you don't want to ever buy an annuity, look away now. Or continue to read in bafflement as to why anyone would want to do such a thing.

Here's the situation so far: Since June 2009 overall average annuity rates have fallen by 11.22 per cent, according to the MGM Advantage Annuity Index. In just the last three months from December 2011 to March 2012 they have dropped 2.1 per cent. Your hard-earned £50,000 pension money will now struggle to buy £3,000 of annual annuity income.

"These findings will continue to put pressure on people approaching retirement," says Aston Goodey, sales and marketing director at MGM Advantage. "They face the triple whammy of making their income go further as life expectancy improves, high inflation eroding their purchasing power and annuity rates continuing their downward trend."

DateDec 09Mar 10Jun 10Sep 10Dec 10Mar 11Jun 11Sep 11Dec 11Mar 12
Enhanced annuity rate7.70%7.65%7.62%7.39%7.24%7.52%7.26%7.09%6.92%6.75%
Conventional annuity rate6.27%6.24%6.18%5.95%5.89%6.25%6.24%5.98%5.70%5.68%

Source: MGM Advantage

The outlook for annuity rates continues to remain uncertain while yields on UK gilts and corporate bonds remain at rock-bottom levels. But there are other factors at play.

Before the end of this year, gender-neutral pricing will see annuity rates for men fall, meaning the majority of annuity purchasers are poorer in retirement.

Following a ruling from the European Court of Justice in March last year, gender pricing for insurance products will be banned from 21 December 2012. The decision will affect the way insurers price annuities. Women live longer on average so currently get lower rates than men. But women's rates are unlikely to improve much, as men still purchase eight in 10 annuities.

If you are male and wanting to secure annuity income, despite the poor rates on offer today you might be better off doing it before 21 December 2012, when rates could fall even further.

More pressure on annuity rates is expected from the impact of Solvency II, a fundamental review of the capital adequacy regime for the European insurance industry. Solvency II rules are expected to be in force on 1 January 2014. The rules are designed to ensure all providers can meet their financial obligations to their customers, avoiding future crises such as the Equitable Life scandal. Furthermore they should give regulators an early warning if provider solvency levels become depleted.

But many industry experts believe the new rules will lead to a reduction in annuity rates due to the constraints it will place on the companies who offer annuities. Axa has already pulled out of the enhanced annuity market, claiming Solvency II will reduce the attractiveness of annuities for both providers and customers.

These mounting downward pressures on annuity rates make it vital that people approaching retirement seek professional financial advice and ensure they shop around for not just the best deal but the right product for their individual circumstances.

For example, if you regularly consume alcohol or smoke tobacco, take prescription medicine or have been in hospital for any length of time then there is a strong chance you could qualify for enhanced annuity rates. This means you could increase your retirement income significantly. The difference between the best enhanced and worst standard annuity rates is more than 50 per cent, according to MGM Advantage.

Finally, remember that every month you defer buying an annuity you miss out on the income that you would have earned from the payments that would have been made, had you gone ahead and bought one. It's time to bite the bullet and make your decision.

CONVENTIONAL VS ENHANCED ANNUITIES

£50,000 pension pot

Average conventional annuity (per year)

Average enhanced annuity (per year)

Percentage differenceDifference over the first 5 years of retirementDifference over average retirement
Men£2,918.36£3,453.3018.33%£2,674.70£9,093.98
Women£2,756.88£3,293.2719.46%£2,681.95£10,727.80

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By Moira O'Neill,
25 April 2012

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Moira O'Neill

Moira O'Neill is the Harold Wincott Personal Finance Journalist of the Year for 2012. She has been a finance journalist for 16 years and joined Investors Chronicle in 2008 where she leads the funds and personal finance coverage.

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