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Billy Burrows: Annuity update

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There has been little change to annuity rates since the last update and this reflects the flat line trend for gilt yields at the moment. The benchmark 15-year gilt yield has remained just under 2 per cent so far in April. Unless yields increase, annuity rates will remain at present levels.

In my recent paper I look at an important element of annuity pricing: mortality cross-subsidy. Mortality cross-subsidy is important for two reasons. Firstly, it enables insurance companies to pay investors a higher income than from non-annuitised policies. Secondly, it provides the insurance that the policyholder will never run out of money.

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A closer look at mortality cross-subsidy and mortality drag, which is the flip side of the coin, shows the subsidy does not become significant until people are over 65 for standard annuities and slightly earlier for enhanced annuities.

This is important when monitoring annuity trends because changes in the pattern of sales may impact on mortality cross-subsidy, which means that even if yields stay the same the income may fall for some annuities if there is a reduction in the cross-subsidy factors.

Billy Burrows is associate director at Key Retirement Solutions and director at Retirement Intelligence

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