Annuity rates plummet 11.5%

Old person holding money

Annuity income suffered its biggest annual fall last year since 1998, according to new research.

The standard annuity for a 65-year man fell by a massive 11.5% during 2012, reveals Moneyfacts, a decrease rate that has not been seen for 15 years.

Women fared better, with the standard annuity for a 65-year women falling 6.1% last year. Most likely this lower figure can be attributed to the "cushioning' provided by the EU's gender neutral pricing law that came into effect on 21 December 2012, which caused some women's annuity rates to rise.

Figures from the financial company highlight just how much the annuity industry is suffering, with an increase in the average annuity rate for a 65-year old male seen in only four years since 1998. In 1999 there was an average rise of 1.8%, 1.3% in 2006 and 4.4% in 2007.

Overall, the average annual annuity income for a 65-year old man has fallen by 56% since Moneyfacts first conducted research into rates in 1994.

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Richard Eagling, head of pensions at Moneyfacts, says record low gilt yields and continual quantitative easing, along with eurozone uncertainty, are not helping the plight of annuities.

Steve Lowe, customer insight director at Just Retirement, says there are two primary factors at play.

Firstly, and most importantly, he blames the "absolute collapse in government gilt rates, which is what most providers base their rates on".

Gilt yields at rock bottom dictate that annuity rates will remain low; even an increase in the interest rate would not help as Lowe says these rates are not based on short-term interest rates, but long-term, 10, 20 and 30-year government bonds.

Secondly, he points to life expectancy, which continues to increase. Lowe says annuities now have to support pensioners over a much longer retirement.

Looking ahead, Eagling comments: "As to the future direction of annuity rates, it is fair to say that the full impact of the switch to gender neutral pricing has yet to play itself out. A period of considerable flux is anticipated as providers look to re-adjust their rates in the first quarter of 2013."  

This article was written for our sister website Money Observer