Annuity Rates Plummet Amid ‘Perfect Storm’

By: MoneyFacts

The latest Moneyfacts Personal Pension and Annuity Trends Treasury Report, has revealed how the annuity market endured a perfect storm during Q3 2014 as a combination of plummeting gilt yields and a marked slowdown in demand following the 2014 Budget took their toll on annuity rates.

Standard annuities

Whereas enhanced annuities faced the heaviest cuts in Q2 2014, this time round standard annuity rates witnessed the biggest reductions.

One of the most noticeable annuity trends to emerge in the months immediately following the 2014 Budget in March was the resilience of standard annuity rates, with providers attempting to hold rates as high as possible in the short-term. However, conditions in Q3 2014 made it much more difficult for providers to maintain their rates, with the average annual income payable from a standard annuity falling by 2.7% at the £10K purchase price and by 3% at the higher £50K purchase price.

As a result, annuity rates finished Q3 2014 at their lowest level since November 2013.

Table 1: Falling average standard pension annuity rates over the last quarter

Richard Eagling, Head of Pensions at Moneyfacts said: “In what is proving to be a particularly testing time for the annuity market providers have once again reverted to more cautious pricing strategies. A fall in annuity rates of the magnitude that we saw in Q3 2014 is unusual, but can be explained by two main factors: a significant recent reduction in gilt yields and the much lower demand for annuities post-Budget.”

Enhanced annuities

Although standard annuity rates saw the largest fall during Q3 2014, enhanced annuities also experienced sizeable reductions. The average annual income payable from a level without guarantee enhanced annuity for a 65-year-old, based on a £10K pension pot, fell by 2.4% and by 1.8% based on a £50K pension pot.

Table 2: Falling average enhanced pension annuity rates over the last quarter

Budget blow

Despite smaller reductions this time round, it still remains the case that enhanced annuity rates have been more severely impacted by the 2014 Budget than standard annuity rates. For example, the average annual income from a level without guarantee enhanced annuity for a 65-year-old based on a £10K pension pot has fallen by 3.8% since the Budget, compared with a 2.9% fall in income for the equivalent average standard annuity.

Richard Eagling, Head of Pensions at Moneyfacts, said: “The pension proposals announced in the 2014 Budget by the Chancellor aimed to unleash greater freedoms in how retirees access their pension pots, but for those still looking for the security of an annuity they also seem to have inadvertently lowered the incomes payable.”

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