This leaves annuity rates facing an uphill struggle if they are to avoid a fifth consecutive year of falls.
The report highlights how the ongoing volatility in gilt yields sparked by a further round of Quantitative Easing and uncertainty over the Eurozone generated a high volume of re-pricing activity amongst annuity providers in Q3 2012. As a result, annuity rates have fallen to historic lows for four consecutive months, a trend which began back in June 2012. Based on a benchmark annuity (standard, level without guarantee), the average annuity income for a 65-year-old male fell by 4.1% during Quarter 3 2012 and by an even greater margin of 4.8% for a 65-year-old female.
These latest reductions mean that annuity rates could post their biggest annual fall since 2002, when annuity income fell by an average of 11.1%. So far this calendar year, average annuity income generated by a standard annuity for a 65-year-old male has fallen by 8.6% (see Table 1).
Unless annuity rates can stage a dramatic recovery in the fourth quarter of 2012 (seemingly unlikely given the imminent switch to gender neutral pricing in December), this will be the fifth consecutive year that average annuity income has fallen. Furthermore, over the past 18 years, a combination of falling gilt yields and improving mortality rates has seen annuity income drop by a massive 55% for males and 52% for females.
During Q3 2012, gilt rates, a key influencer of annuity rates, were further depressed by the Bank of England’s decision to increase its Quantitative Easing Programme by £50 billion to £375 billion. As a result, 15-year gilt yields fell from 2.24% to 2.16% during the course of the third quarter, hitting an all-time low of 2.02% on 2 August 2012.
The Moneyfacts Personal Pension and Annuity Trends Treasury Report also noted that during the third quarter of 2012 female annuity rates generally experienced larger reductions than their male counterparts. Meanwhile, in terms of the different annuity options available, the largest falls in income were posted by female level guaranteed five year annuities and escalating 5% without guarantee annuities. The smallest reductions in the income payable were experienced by RPI-linked without guarantee annuities.
There were also some wide variations between annuity providers with regards to the size of the rate reductions introduced during Quarter 3 2012. For a standard, level without guarantee annuity, the rate reductions ranged from 2.5% (Prudential) to 7.3% (SAGA) for a male aged 65 years old, and from 2.6% (Standard Life) to 6.9% (Canada Life) for an equivalent female.
Richard Eagling, Head of Pensions at Moneyfacts, said:
“Those approaching retirement are often urged to delay annuitizing until annuity rates improve, but the findings of our report show that annuity rates have only increased in three out the last eighteen calendar years. The high volume of annuity repricing that has characterised most of this year is likely to persist in the fourth quarter of 2012 as annuity providers finally move towards introducing gender neutral rates to satisfy the requirements of the EU Gender Directive.”
