Where next for annuity rates?

Annuity rates have dropped to an all-time low and are expected to continue falling for the next five years.

The average rate for a male aged 65 purchasing a level without guarantee annuity (based on a £10,000 pension pot) has decreased by 6.3% since last August, while the equivalent female annuity rate has dropped 5.6%.

The reductions mean that the average male annuity rate has fallen by a massive 45.5% over the last 15 years, while female rates have dropped by 41.8%.

In August 1995, a woman aged 65 would have got an average annual payout of £982 from a £10,000 pension, according to Investment Life & Pensions Moneyfacts. Now she would receive just £571.

The amount of income paid by an annuity is calculated with reference to the current yields on gilts and corporate bonds, as well as life expectancy.

So annuity rates fell dramatically this summer when bond yields dropped as a result of continued uncertainty in financial markets.

"With gilt yields still low and life expectancy increasing we can expect annuity rates to fall further still," comments Richard Eagling of Investment Life & Pensions Moneyfacts. "Tomorrow's pensioners face a desperate battle to secure a comfortable retirement."

Research from life assurer MGM Advantage, which interviewed 44 financial advisers that specialise in the annuity market, shows that the majority expect rates to fall over the next five years. One in four advisers expect them to decline by between 7.5 and 10%.

Aston Goodey, sales and marketing director at MGM Advantage, comments: "There is a lot of pressure on annuity rates at the moment, including increased life expectancy and Solvency II [a European Commission policy due to be implemented in 2012], which will require insurers to keep back more capital."

This article was originally published in Money Observer - Moneywise's sister publication - in October 2010