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Annuity competition has never been weaker

Annuity competition has never been weaker

Category: Annuities

Updated: 27/07/2016
First Published: 27/07/2016

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 It is now over 6 months old so the content may be out of date.

The latest analysis of the annuity market by Moneyfacts has highlighted the challenging pricing conditions facing the sector, and suggests that competition in the annuity market has never been weaker – the combination of which has pushed annuity rates to fresh lows.

Lack of appetite

The analysis, conducted for the latest Moneyfacts Personal Pension and Annuity Trends Treasury Report, reveals a lack of appetite among providers to compete for annuity business, a trend that has been apparent since the Government first announced its pension freedoms in 2014 and demand began to fall. However, it has come to the foreground even further in recent weeks, and combined with a dramatic fall in gilt yields, it means that annuity rates have plummeted.

Indeed, the average annual income from a level without guarantee standard annuity fell by 3.4% (based on a £10K purchase price) during the second quarter of 2016. Since then, rates have fallen even quicker, with average income falling by 6.3% in the month following the outcome of the EU referendum.

Rates for enhanced annuities fared slightly better, falling by just 0.7% in the last quarter and by 4.9% following the referendum, but it still isn't good news. Indeed, annuity rates are now at record lows, and have declined by as much as 12% since the start of the year.

In value terms, this means that a typical retiree who purchases a standard annuity at age 65 with a pension pot of £10,000 will now receive an annual income of just £431, down from £460 at the time of the referendum, and a notable decline from the £490 that could be achieved on 1 January this year.

Richard Eagling, head of Pensions at Moneyfacts, said that the severe fall in rates has "left many retirees facing a conundrum: they still want a secure sustainable lifetime income, but are reluctant to annuitise at a time of record low rates".

Competition stalling

The lack of competition can be further seen when looking at the narrowing gap between the highest and lowest annuity rates on offer. In the second quarter of the year, this gap fell from 16.1% to 10.7%, and has since fallen further still to just 9.2%, the lowest level we've ever recorded.

But why has the gap between the most and least competitive annuities closed so significantly in recent months? Quite simply, it's because the formerly market-leading rates have been cut more heavily than those at the bottom, as they gave greater margins to do so.

"This reflects the fact that some annuity providers currently do not want annuity business, so are effectively pricing themselves out of the market," stated Richard. "Not only that, but the significant number of retirees who are still not shopping around for the best rate is even less likely to encourage competition. With the majority of annuitants remaining with their existing pension provider and not seeking expert financial help, the motivation for annuity providers to compete on price has been reduced."

This is further compounded by the fact that the open market is contracting significantly. The number of providers competing in the market has fallen to a new low of just 11, a figure which has more than halved since 1994, as company mergers and active decisions to withdraw from the market weaken competition even further.

So just what can you do? Competition may be lacking and annuity rates falling, but it's worth remembering that an annuity is still the only way to achieve a guaranteed income throughout retirement. If anything, the latest turn of events means it's even more important to shop around and make sure you're getting the best outcome possible.

Don't automatically opt for the deal offered by your existing pension provider without heading to the open market, because you could easily be missing out. Instead, consult our no-obligation annuity planning service to get started, and see if you can secure a better rate.

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.