Annuity rates plummeted by 3 per cent in the third quarter of 2014 to the lowest level since November 2013. The market endured a perfect storm during the past three months as a combination of plummeting gilt yields and slowdown in demand following the 2014 Budget took their toll.
Moneyfacts reported that in the months immediately following the March Budget, in which the chancellor announced new pension freedoms, providers attempted to hold rates as high as possible. However, conditions in Q3 2014 made it more difficult to maintain their rates.
According to figures from retirement income specialist MGM Advantage, which looked at level annuities without a guarantee, the average annuity today of £3,074 per year (based on a £50,000 purchase price) would pay £2,058 less income over an average retirement, compared with the equivalent annuity puchased in March.
On the positive side, if interest rates improve and gilt yields increase, annuity rates could rise. However, the market is talking about the middle of next year before we are likely to see any increase in annuity rates.
Meanwhile, the outlook for annuity rates remains unpredictable. Downward pressures on annuity rates include the fact that people are living longer and the effects of Solvency II, an EU legislative programme that is forcing insurers and annuity providers to drive up their capital reserves, passing costs onto annuity customers.
Annuity providers also say they face the uncertainty of self-selection, as the impact of new pension freedoms is made clear. If more people opt to take their pensions directly via drawdown, many future annuity buyers may be people more likely to live longer. However, in competitive parts of the market, prices may get keener as providers seek market share.
Although standard annuity rates saw the largest falls, enhanced annuities that give better rates based on the health of the applicant also experienced sizeable reductions.
HOW ANNUITY RATES HAVE FALLEN
Average standard annuity rate age 65, £50k purchase price | |
|---|---|
| Q2 2014 | £2,886 |
| Q3 2014 | £2,799 |
| 3-month change | -3% |
Average enhanced annuity rate age 65, £50k purchase price | |
| Q2 2014 | £3,413 |
| Q3 2014 | £3,349 |
| 3-month change | -1.8 |
Source: Moneyfacts Personal Pension and Annuity Trends Treasury Report, 27 October 2014
