Annuity rates on track for worst ever year
Annuity rates are on track to post their biggest ever annual fall, according to new research compiled by Moneyfacts.
The data provider looked at how annuity rates for a healthy 65-year-old male with £50,000 had changed since the start of 2016. Moneyfacts found that rates had declined by 15% year-to-date.
As the table below shows, unless there is a strong recovery in annuity rates in the remaining three months of the year, 2016 is set to be marked out as the worst ever year for annuities.
Record low gilt yields, with the benchmark 10-year UK government bond yield slipping below 1 per cent for the first time ever in late June, have been the main driver behind annuity providers cutting rates.
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Most providers buy this type of bond to provide the fixed income they pay to policyholders. As a consequence, rates for those purchasing an annuity are negatively affected when gilt yields decline.
Brexit has had a big impact. Before the EU referendum result the 10-year UK government bond yield was 1.37%, but today the yield is 0.92%. At one point last month the yield slipped to as low as 0.53%.
Richard Eagling, head of pensions at Moneyfacts, said: 'It has been a truly awful year for annuity rates, with rates falling to all-time lows.
'This is particularly disappointing as the stock market volatility that we are experiencing has re-emphasised the importance of a secure lifetime income for many retirees.
"Unfortunately, record low gilt yields following the EU referendum result and a significant weakening of competition in the annuity market have both exerted considerable downward pressure on annuity rates during 2016."
Average annual change in pension annuity income since 2006
|Calendar year||Average annual change in annuity income (%)|
Source: Investment Life and Pensions Moneyfacts. Figures based on a male aged 65 purchasing a standard level without guaranteed annuity.
How falling gilt yields have hit annuities
Annuity rates have been in decline for 20-odd years, due to the fact that people are living longer.
As a result insurers have become less generous, but the decline intensified during the financial crisis, which pushed both gilt yields and interest rates down to record low levels.
Another factor has been quantitative easing (in which the government buys bonds, pushing down yields), which again has had an adverse impact on the gilt market and therefore annuity rates.
Before the crisis struck, the 10-year UK government bond yield was above 5 per cent. It is now 0.92%.
When annuity rates peaked in 1990, a healthy 65-year-old man with £100,000 received £15,000 a year; today he will pocket less than £5,000.
This story was originally written for our sister magazine, Money Observer.
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%.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
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.
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.