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Annuity rates suffer record fall in Q3

Aston Goodey
Aston Goodey

Pension experts have warned retirees face more annuity pain next year as the third quarter of 2012 saw record falls in the rates offered by providers.

According to analysis conducted by MGM Advantage, conventional annuity rates fell by 7 per cent between June and September, while enhanced rates dropped by 5 per cent.

This means the average conventional annuity a person with a £50,000 pension pot can buy has been cut from £2,853 at the end of June to £2,653 at the end of September. This represents the largest three month fall since the provider started monitoring rates in August 2009.

MGM says over the past three years, average annuity rates have plummeted by 20 per cent.

MGM Advantage distribution and marketing director Aston Goodey (pictured) says rates are likely to drop further as a result of Solvency II, which will force insurers to hold more capital.

The EU gender directive, which will ban providers from offering gender-specific annuities, is also expected to lead to a fall in male annuity rates.

Goodey says: “Annuity rates are in free fall, largely driven by record low gilt yields. Annuity providers have yet to fully price in the effects of Solvency II or the EU gender directive so we are expecting further falls over the coming months unless we see a significant upward movement in gilt yields.”

Barnett Waddingham consultant Malcolm McLean says: “We must now be heading towards a tipping point where annuities barely return the capital given up over an average life expectancy and thus in the eyes of most people represent an unacceptably poor investment of their pension savings.

“At a time when millions are being enrolled in pension plans that culminate in the purchase of an annuity, this sends out some very negative vibes and risks jeopardising the success of the entire auto-enrolment project.”

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  1. If you are relying on drawing an annuity in the near future then it might be worth bringing this decision forward.

    Annuity rates have fallen considerably in the last decade and again recently as providers gear up for gender equalisation. Looking at the current 15 year gilt yield there appears to be the scope but no appetite among providers for rates to increase. Male rates could fall further in 2013 as rates equalise with females (before a possible general recovery). In time the ceasing of quantitative easing and the economic recovery should create a better environment for pensioners but that could be quite a wait and that will not be an option for some people.

    On the other hand most pension fund values are at a medium term high & converting a fund now could secure this fund before a possible fall in value? There are still difficulties in the economies that drive the main stock markets and only a fool will guarantee if you will be better or worse off by buying an annuity now.

    The fact remains that for many clients annuity rates still do not offer a good deal…

    A current annuity is just 5.3% for a 65 year old male with no escalation, the same annuity in October 1990 was 15.64% but that was when the FTSE 100 stood at just 2000 compared to 5900 now. Spookily enough I have worked out that 2000 x 15.64% gives almost exactly the same answer as 5900 x 5.3% representing the same income for pensioners then as now but of course it takes no account of the devaluation of the buying power of that money which has roughly halved!

    All said and done annuities do provide certainty in an uncertain world.

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