Annuity rates down 14% over three years
Overall annuity rates have fallen by 14% in three years, and conventional rates have dropped more than 2% since March.
The figures, from provider MGM Advantage, also show that enhanced annuity rates, which are sold to pensioners with long-term illness or those who smoke, for a pension pot worth £50,000 are down 2.29% since March.
Three rounds of quantitative easing (QE), volatile stockmarkets and rock-bottom gilt rates are behind the fall in annuity rates.
Aston Goodey, distribution and marketing director at MGM Advantage, says that as rates are "unlikely" to bounce back in the near future, buying an annuity today could be the best option.
He says that QE has had an adverse impact on annuity rates, adding that the forthcoming EU gender directive – which will prohibit insurance providers from discriminating between men and women – will mean annuity rates could fall further.
In addition, MGM found there is a widening gulf between the best standard annuities and the worst. Women could benefit from an extra £8,480 over their retirement if they chose a top-quartile rate, while men could pocket an extra £6,528 by shopping around on the open market.
Looking at the market as a whole, the figures show that the difference in income between the top enhanced rates and the bottom conventional rates stands at 43% for men, and a higher 46% for women.
Essentially, that means a 65-year old female that qualified for an enhanced annuity could take home an income of £3,218 a year, compared to just £2,704 if she were to buy a conventional annuity. MGM estimates that by choosing an enhanced annuity, both women and men could benefit from more than £10,000 and £8,500 worth of income respectively over the course of an average retirement.
This article was written for our sister website Money Observer
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.