Annuity rates have fallen by around 3% over the past three months, the biggest drop since September 2010. The news comes after figures released last week show life expectancy is still increasing.
Annuity rates have fallen by around 3% over the past three months, the biggest drop since September 2010.
The news comes after figures released last week show life expectancy is still increasing.
In 2010, average life expectancy at birth across the UK, for both men and women, rose by another four months to 78.2 and 82.3 years respectively.
For people aged 65, average life expectancy rose by two months, according to the Office for National Statistics.
How to find the best annuity providers
What impacts annuity rates?
Annuity rates refer to the amount of money people can receive from their pension, from when they retire until they die. Retirees swap their pension pot for an annual income from an annuity provider. Research from annuity provider MGM Advantage reveals that average annuity rates have fallen by 5.79% since June 2009, on the back of increased life expectancy.
Annuity rates are also affected by gilt yields, so if the yields on gilts fall the income paid from an annuity will also decrease.
The government's announcement earlier this month that it would do another round of quantitative easing prompted the gilt price to rise, which pushed down its yield.
Tom McPhail, head of pensions research at Hargreaves Lansdown, says further annuity rate cuts could be on the cards.
"In the aftermath of the QE announcement in 2009 (up to the end of March 2009) there were 18 annuity rate cuts and just 2 rate rises," he says.
Further falls to come
MGM Advantage also believes rates will continue to fall. Aston Goodey, sales and marketing director at MGM Advantage, says: "Since launching our Annuity Index in June 2009, it has fallen seven out of the eight times it has been updated. As people live longer, the long-term outlook for conventional and enhanced annuities is one of overall falling rates."
Experts say that consumers nearing retirement that want to buy an annuity must spend time researching the market and comparing different rates. MGM Advantage says the difference in the income paid between the top and bottom conventional annuity rates can be almost 20%.
For example, a woman with a £50,000 pension could receive £3,108 annual income from an annuity from a top provider, or she could receive £2,623 per year from a less competitive provider – a difference of 18.5%.
This article was taken from our sister website 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.
