Increased life expectancy sees annuity rates drop 3%

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.

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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