21 Nov 2024

Annuity rates down 2.7% in 2010 despite late rally

The record number of individuals turning 65 this year are likely to face a major challenge when they come to secure their retirement income after research from Investment Life & Pensions Moneyfacts revealed that annuity rates fell for the third consecutive year in 2010.

Another frustrating year
The average rate for both males and females aged 65 purchasing a standard level without guarantee annuity (based on a £10K purchase price) decreased by 2.7% in 2010 (see Table 1). This may be a disappointing drop, but it is less severe than the cuts posted in 2009 when annuity rates endured a more painful reduction of 8.7%. Enhanced annuity rates experienced lower falls than their conventional counterparts, with the average male rate down by 2.1% and the average female rate down just 1.4%.

Table 1: A pension annuity rates over the last twelve months

	Average standard annuity rate Male age 65	Average standard annuity rate Female age 65
1 January 2010	£624	£584
1 January 2011	£607	£568
1 year change	-2.7%	- 2.7%
Figures show gross annual annuity payable monthly in advance. Figures based on an annuitant aged 65 buying a standard ‘level without guarantee' annuity for a purchase price of £10K. Source: Investment Life & Pension Moneyfacts 1.1.2011

Late mini rally
Last year’s drop would have been far greater had it not been for a late mini rally in rates. Having taken a big hit during the summer and early autumn months, annuity rates staged a welcome mini rally during the last two months of 2010, increasing on the back of rising bond yields. At the £10K purchase price point, the average male annuity rate increased by 1.5% and the female rate by 1.6% between November 2010 and January 2011. For the higher purchase price of £50K, this upsurge has been even greater, with the average male rate up by 1.7% and the average female rate now 2% higher. These latest increases mean that annuity rates have now returned to August 2010 levels.

Market leading rates
The market leading rates available through the course of last year seem to have been more adversely affected than the average rates (see Table 2). Back in January 2010 the top standard level without guarantee annuity rate for a male aged 65 (based on £10K) was £678. Now the market leading rate is just £647, a reduction of 4.8%. The equivalent market leading rate for a female has dropped by 4.1%.

Table 2: Market leading pension annuity rates over the last twelve months

	Best annuity rate Male age 65	Best annuity rate Female age 65
1 January 2010	£678	£634
1 January 2011	£647	£608
1 year change	-4.5%	- 4.1%
Figures show gross annual annuity payable monthly in advance. Figures based on an annuitant aged 65 buying a standard ‘level without guarantee' annuity for a purchase price of £10K. Source: Investment Life & Pension Moneyfacts 1.1.2011

An historical perspective
Whilst the latest fall in annuity rates may not seem that damaging by itself, the longer term picture reveals the extent to which today’s retirees are struggling to achieve the same level of retirement income afforded to their predecessors (see Table 3).

Over the past 16 years, a combination of falling gilt yields and improving mortality rates has seen rates drop by a massive 46% for males and 43% for females.

Table 3: 16 years of falling pension annuity rates

	Average annuity rate Male age 65	Average annuity rate Female age 65
1 January 1995	£1,138	£1,010
1 January 2011	£607	£568
16 year change	-46.6%	-43.7%
Figures show gross annual annuity payable monthly in advance. Figures based on an annuitant aged 65 buying a standard ‘level without guarantee' annuity for a purchase price of £10K. Source: Investment Life & Pension Moneyfacts 1.1.2011

Where next?
For those baby boomers about to hit retirement the big question is what does the future hold for annuity rates, and can the recent revival in annuity rates continue during 2011?

“The recent annuity rate rally is unlikely to last much longer, and could ultimately prove nothing more than temporary respite from their downward trajectory,” said Richard Eagling, Editor of Investment Life & Pensions Moneyfacts. “One of the key influencers of annuity rates are the yields on gilts and corporate bonds, and unless these continue their recent upsurge for a sustained period, annuity rates are likely to remain in the doldrums.”

Moneyfacts Group
Moneyfacts is the UK’s leading independent provider of personal financial information and our data is used and trusted throughout the financial industry.

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