Annuity rates are set to fall for the fifth consecutive year and could tumble to their biggest annual drop since 2002.
The average annuity income for a 65-year-old man has fallen by 8.6% so far this year, according to Moneyfacts. The research company says that unless rates stage a dramatic recovery in the last few months of 2012, they will have fallen for the fifth consecutive year. It could also be the biggest annual fall since 2002, when annuity income fell by an average of 11.1%.
During July to September this year the average annuity rate for a 65-year-old man fell by 4.1%, while the rate for a 65-year-old woman slipped by 4.8%.
The sharp decline in annuity rates followed wholesale repricing among insurers, due to volatility in gilt yields sparked by quantitative easing and uncertainty over the future of the eurozone. The yield on 15-year gilts slumped from 2.24% to 2.16% during the third quarter of 2012, hitting an all-time low of 2.02% on 2 August.
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Repricing
Richard Eagling, head of pensions at Moneyfacts, expects repricing to continue during the rest of the year, especially as insurers move to meet the EU Gender Directive requirements. The directive stipulates that all insurance pricing, for everything from car insurance to annuities, must be gender neutral from 21 December.
Cheaper car insurance for women and more generous annuity rates for men, who typically have a lower life expectancy than women, will become a thing of the past.
Prudential shifted its annuity rates to gender-neutral pricing five weeks ahead of the deadline. To equalise men's and women's rates it has made women's rates much more generous and only decreased men's rates slightly.
For example, an inflation-linked annuity rate for a 75-year-old woman has increased by 11%, while the rate for a man of the same age has only been cut by 1%. For younger pensioners, the difference is less marked, but the increase for women is still bigger than the decrease for men.
Tom McPhail, head of pensions research at Hargreaves Lansdown, says: "The bulk of the movement [at Pru] has been in women's favour, with only modest reductions for men. For women approaching retirement, there is little to gain by annuitising now. For men, the message is clear: if you're planning on buying an annuity soon, get on with it immediately."
Some insurers may change all their rates ahead of the deadline while others may wait until the last minute. Just Retirement plans to quote on both a gender-neutral and a gender-specific basis from 8 December.
Gender-specific rate applications will need to be received by 20 December to be considered.
This article was written for our sister publication Money Observer
Yield
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Quantitative easing
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.
Gilts
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
Annuity
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.
Inflation
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
