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Buchanan warns new pension vehicle may depress annuity rates

Pension simplification will put further downward pressure on annuity rates as increasing numbers of people favour alternative secured pensions over annuities, providers are warning.

Many retirees will take out ASPs as they do not have long life expectancy. Actuarial assumptions underpinning standard annuity rates will therefore need to change as there will be fewer retirees with shorter lifespans to offset those who live beyond their life expectancy.

Scottish Life group communications director Alasdair Buchanan says standard annuity rates assume a standard rate of health among annuitants but, if more retirees choose not to annuitise, then the average assumption of health levels will be wrong.

GE Life head of strategic development Dave Lowe also believes that ASPs could depress annuity rates but maintains that the key determinant of rates will continue to be long-term gilt yieldsBuchanan says: “Conventional annuity rates are going to worsen. If people of a certain type are in ASPs, the assumption that everyone annuitising is of standard health is going to be flawed.”

Lowe says: “Standard rates will worsen because of people exercising this choice but you need to look at all the factors at play bringing downward pressure on annuity rates.”


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