Annuity rates are set to fall for the fifth consecutive year and could tumble to their biggest annual drop since 2002.
The average annuity income for a 65-year-old man has fallen by 8.6% so far this year, according to Moneyfacts. The research company says that unless rates stage a dramatic recovery in the last few months of 2012, they will have fallen for the fifth consecutive year. It could also be the biggest annual fall since 2002, when annuity income fell by an average of 11.1%.
During July to September this year the average annuity rate for a 65-year-old man fell by 4.1%, while the rate for a 65-year-old woman slipped by 4.8%.
The sharp decline in annuity rates followed wholesale repricing among insurers, due to volatility in gilt yields sparked by quantitative easing and uncertainty over the future of the eurozone. The yield on 15-year gilts slumped from 2.24% to 2.16% during the third quarter of 2012, hitting an all-time low of 2.02% on 2 August.
Richard Eagling, head of pensions at Moneyfacts, expects repricing to continue during the rest of the year, especially as insurers move to meet the EU Gender Directive requirements. The directive stipulates that all insurance pricing, for everything from car insurance to annuities, must be gender neutral from 21 December.
Cheaper car insurance for women and more generous annuity rates for men, who typically have a lower life expectancy than women, will become a thing of the past.
Prudential shifted its annuity rates to gender-neutral pricing five weeks ahead of the deadline. To equalise men's and women's rates it has made women's rates much more generous and only decreased men's rates slightly.
For example, an inflation-linked annuity rate for a 75-year-old woman has increased by 11%, while the rate for a man of the same age has only been cut by 1%. For younger pensioners, the difference is less marked, but the increase for women is still bigger than the decrease for men.
Tom McPhail, head of pensions research at Hargreaves Lansdown, says: "The bulk of the movement [at Pru] has been in women's favour, with only modest reductions for men. For women approaching retirement, there is little to gain by annuitising now. For men, the message is clear: if you're planning on buying an annuity soon, get on with it immediately."
Some insurers may change all their rates ahead of the deadline while others may wait until the last minute. Just Retirement plans to quote on both a gender-neutral and a gender-specific basis from 8 December.
Gender-specific rate applications will need to be received by 20 December to be considered.
This article was written for our sister publication Money Observer