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Another poor year for annuity rates

Another poor year for annuity rates

Category: Annuities

Updated: 11/01/2016
First Published: 11/01/2016

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

New research from Moneyfacts has revealed that 2015 was another poor year for annuity rates, as uncertainty created by the new pension freedoms, low gilt yields and industry preparations for new regulations all took their toll on the market – with disappointing results for retirees.

Annuity rates have more than halved since 1994

The research found that annuity rates in 2015 fell for the second year running, and worryingly, have now declined in 17 out of the 21 calendar years since we started recording this data in 1994. The reduction has been marked, too, as during this period, the average annual income payable from a standard level without guarantee annuity has fallen by a considerable 56%.

Given the environment, it's little wonder. Annuity rates had the worst possible start to 2015, with the biggest monthly fall in standard annuity rates that we've ever recorded: the average annual income payable on our benchmark annuity (standard, level without guarantee) for a 65-year-old with a pension pot of £10,000 fell by 4.5% in January 2015, and by 4.8% for a £50,000 pension pot.

Further rate reductions during March and April 2015 saw annuity rates fall to record lows just 17 days into the new pension freedoms regime, which was unfortunate timing for those individuals who may have deferred making a choice until the introduction of the new options and subsequently decided that an annuity was the most suitable product for them after all.

Rates saw a slight recovery in the summer and entered a period of "relative calm" during the third quarter, but they ended the year just as they had begun it, with some sharp reductions during the final three months of 2015.

As a result, the average annual income payable from a standard level without guarantee annuity for a 65-year-old fell by 3.1% at the £10,000 purchase point, and by 5.6% at the £50,000 purchase point, during 2015 as a whole. Joint life standard annuities saw even bigger reductions, with rates dropping by as much as 7.7%.

Low rates = low income

Looking at the figures from an income perspective highlights things in more detail. Let's say that you are a typical 65-year-old with a pension pot of £50,000. If you purchased a level without guarantee annuity in January 2015, you would have received an annual income of £2,727 – but that figure has dropped to £2,573 today (down 5.6%).

However, enhanced annuities have seen even sharper falls, with 2015 being a particularly tough year for this sector. In fact, the average annual income payable on an enhanced level without guarantee annuity for a 65-year-old fell by between 5.5% and 6.5%, depending upon the purchase price. This means that, if you had a £50,000 pot and bought an enhanced level without guarantee annuity last year, you'd have received an annual income of £3,250, but this has fallen to £3,037 today (down 6.5%).

"2015 proved to be another difficult year for annuity rates with providers forced to stay on their toes and cut rates in order to react to low gilt yields, the reduced business volumes brought about by pension freedoms and the need to fully factor in the new Solvency II requirements," explained Richard Eagling, head of Pensions at Moneyfacts. "The fact that annuity rates have more than halved over the last two decades shows the challenge that will continue to face retirees looking for a retirement income in the year ahead."

What next?

Annuity rates may be faltering, but an annuity is still the only way to guarantee an income throughout your retirement. To discuss your options and see if this route could be worth considering, consult our no-obligation annuity service to find out more.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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