Annuity rates up 10% over three months

2 December 2016

A pronounced recovery in gilt yields, coupled with greater levels of competition, have led to a bounce in annuity rates over the past three months.

The average annuity rate has risen by 10.6%, meaning a £50,000 investment made now will buy a secure income for life of almost £2,600 a year, compared with just under £2,350 if the same annuity had been bought in August, according to figures from Moneyfacts.

The rate now stands at 5.18%, up from just under 4.7% in August. Over a typical retirement, that annual increase would amount to more than £5,200 extra being paid out on a £50,000 annuity.

10-year gilt yields fell to a record low of 0.52% in mid August; amid fears of rising inflation and worries about prospects for the UK economy. But since hitting the low they have staged a quiet recovery. Today gilt yields have almost tripled, rising to around 1.5%.


Shopping around important

Andrew Tully, pensions technical director at Retirement Advantage, comments: “Annuity rates were hit hard by falling gilt yields in the immediate aftermath of the vote to leave the European Union.

“Fortunately gilt yields are on the way up again. Providers are also pricing to attract business, and these two factors have combined to push annuity rates back up to pre-referendum levels.”

Annuities have become less widely used since the pension freedoms were introduced in April 2015, but they can be an attractive option for the many people with medical conditions or particular lifestyle factors (such as smoking, obesity, certain postcodes), who are eligible for more generous 'enhanced' annuities because their life expectancy is shorter.

Although a majority of those looking to buy an annuity would qualify for an enhanced rate, figures from the Association of British Insurers (ABI) show that only 40% bother to compare rates in the open market and instead simply accept the rate they are offered by their pension provider.

Yet the Moneyfacts figures show that the enhanced rates can make a significant difference, with a differential of 26% between the worst standard and best enhanced rates - underscoring the importance of shopping around before you buy.

Research by the Financial Conduct Authority revealed around 80% of annuity purchasers could get a better deal by shopping around. The average increase in income available by going to the open market was 6.8%.


Despite the fall-off in the popularity of annuities, 80,000 people a year are still buying an annuity according to the ABI, and for many retirees they are still important as a guaranteed income to cover at least basic expenses.

Tully adds: “People approaching retirement will need to think about how they can bank an income to pay the bills, and create enough flexibility to protect their pension from any nasty surprises.

“This is a tall order, but the new hybrid retirement accounts allow people to simply and easily choose an appropriate level of guaranteed income alongside the flexibility of drawdown.”

This story was originally written for our sister magazine, Money Observer.

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