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Annuity rates set for second year of rises

Annuity rates set for second year of rises

Category: Annuities
Author: Lieke Braadbaart
Date: 07/08/2018

The latest Moneyfacts UK Personal Pension Trends Treasury Report has revealed that in the first six months of 2018, the average annual annuity income rose by between 1.4% and 4.8%. If this trend continues, this would mark the second year in a row wherein annuity rates have risen – the first time this has happened since 2007.

Annuity rate comeback

After falling to all-time lows following the EU referendum result, annuity rates have made a strong comeback, with the average annual standard annuity income increasing by 14.6%. This means it's now just 1.2% lower than it was when the pension freedoms were introduced in April 2015 – which had an immense impact on the retirement market.


Average annual change in pension annuity income (based on £10,000 level without guarantee annuity for an individual aged 65)
Period % change in annual annuity income
H1 2018 1.4%
2017 1.0%
2016 -5.3%
2015 -3.1%
2014 -5.7%
Source: Moneyfacts UK Personal Pension Trends Treasury Report


The data further shows that the second quarter of 2018 was the third consecutive quarter wherein standard annuity rates have risen, although only modestly. Specifically, the average annual standard level without guarantee annuity income for someone aged 65 with a £10,000 pension pot increased by 0.6% to £476 in July, while the income for those with a pot of £50,000 rose by 1.2% to £2,626.

"Despite their much-reduced popularity, annuities remain the only at-retirement product that enables individuals to insure against investment and longevity risk," Richard Eagling, head of Pensions at Moneyfacts, commented. "[With rates on the up, this] raises the question as to whether an annuity would be a more suitable option for risk-averse retirees currently holding cash in their drawdown plans for no long-term strategic reason."

Mixed news

Whether or not rates have risen sufficiently enough to tip the balance of power back to annuities remains to be seen, especially as there are some disparate pricing trends to be found within the market. Richard found that those opting for a standard level without guarantee annuity at 65 saw annual income increase by 0.6% to 1.2%, but those aged 70 only saw rises of between 0.5% and 1%.

Meanwhile, annuitants aged 75 only saw a marginal rise of 0.3% at the most, which shows that older people have less reason to cheer when it comes to annuity news. This is despite older customers having more reason to opt for an annuity, given the security they can give especially those in declining health (not to mention the higher rates that come with an enhanced annuity for those that do have serious health problems), among other things.

Competition seems to be the main culprit, with a more substantial fall in the average standard annuity income for those aged 75 (3.4% since the pension freedoms) compared to those who are 70 years old (2.3%) or only 65 (1.2%). Retirees may therefore want to get their annuity income secured sooner rather than later.

Fewer providers but better spread

Speaking of competition, a quick look at the annuity charts shows that there are not that many providers in the market anymore, but this isn't necessarily a bad thing, as analysis reveals that the gap between the highest and lowest annuity income available has shrunk as a result. While the difference between the highest and lowest income stood at 13.9% a year ago, and at 16% prior to the pension freedoms, that gap has now decreased to 4.9%.

"While the narrower annuity income spread arguably reduces the risk of consumers locking themselves into poorer-value annuity rates, it does raise the possibility that individuals could become complacent, and view a 5% difference as not being enough of an incentive to shop around," Richard said. "It is hoped the FCA's requirement that providers must inform consumers about how much they could gain from shopping around and switching provider before they buy an annuity will counter this."

What next?

While it's certainly good news that providers are now having to talk to their consumers about what is genuinely the best option for them, that doesn't mean you should rely solely on them. Why not have a look at the annuity charts yourself or read some of our retirement guides to get a better idea of what your options are?

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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