Annuity Update – March 2012


Posted by: billy burrows, on 21/03/2012, in category "Latest news and media"
Views: this article has been read 23997 times

Introduction

After 6 months of depressing news about annuity rates it seems that we have the left the bad news behind us; or have we?

The reason for optimism is that yields on 15 year gilts have increased from an all-time low of just below 2.5% at the beginning of 2012 to just under 3% in the middle of March. This 50 basis point increase should translate into about 4% increase in annuity rates but annuity rates have only increased by a small margin.

Although it is early days this does support my prediction that annuity yields would rise, but the full increase would probably not be passed to annuitants.

Why isn’t the full impact of the hike in gilt yields being passed on to annuitants? First there is the obvious time lag; normally nothing happens quickly in pensions. Secondly there are only three companies offering competitive standard (normal health) annuities so there is not as much competition as we would like. These companies are Aviva, Canada Life, and Legal & General.

Enhanced Annuities

There is more competition for enhanced annuities with companies such as Just Retirement, LV=, MGM and Partnership, in addition to the three already mentioned paying higher incomes for those with a lifestyle or medical condition which may reduce their life expectancy.

To qualify for an enhanced annuity, investors will need to able to answer yes to one of the following questions:

  • Do they smoke?
  • Are they taking prescription medication?
  • Have they been to hospital recently for a medical condition?

Unlike the standard annuity market, the enhanced annuity market is very competitive. However investors need to be on their toes because whereas the standard annuity market is completely transparent, the same cannot be said for the enhanced market so customers really do need to seek an expert help in order to secure the best rates.

Sword of Damocles

The third reasons why those approaching retirement should not hold their breath in anticipation of a significant rise in annuity rates is the “Sword of Damocles” in the guise of Solvency II and gender neutral annuity pricing.

Solvency II is a complex piece of EU regulation that will result in life companies setting aside more capital to support their future liabilities. If annuity companies have to put more capital aside to finance their annuities it will inevitably result in lower incomes. This is one of the reasons why Prudential is considering moving its HQ overseas.

Gender neutral annuity pricing means exactly that. The rates for men and women will the same despite the obvious difference in life expectancy. It’s hard to see who will benefit except for single ladies as married ladies will lose out from the lower income from joint life annuities.

Both measures will kick in from beginning of 2013 and although the effects on annuity incomes is unknown it is likely to be less than the 10% -20% reduction that appears in some headlines but it will have a negative effect.

Annuities at a tipping point

In the unlikely event that there is a significant cut in annuity rates as the year progresses there must surely come a point when guarantee annuity rates can no longer be thought of as the default option at retirement. Some commentators argue that we have reached that point already and those with above average pension funds should consider the investment linked alternatives.

In conclusion, I think annuity rates have reached the bottom of the current cycle and we may see some very small increases until the double whammy of Solvency II and gender neutral pricing kick in at the end of the year.


User Feedback

Post your comment
Name:
E-mail:
Comment:
Insert Cancel
Annuity News

 

The views and comments expressed are those of the author and do not represent the views of any other person or company.

This information in no way constitutes financial advice. We are not liable for any damages arising from the use of this site, or any material contained in it, or from any action or decision taken as a result of using this site or any such material.

 

Previous Blogs
Posted by: billy burrows, on 24/03/14, in category "Blog Achieve " - this has been read 523 times
Some commentators have described the increased flexibility for pensions announced in the Budget as sounding the death knell for annuities. Far from it, I see a good future for annuities but in a different market to that of today. The Government has ended the long standing principal that a pension should pay a regular income for life - something that was set in stone by previous policy makers. However, there is little surprise that radical change is here because the current annuity bubble had to burst at some time but nobody thought it would burst in such a grand style
Posted by: billy burrows, on 15/10/13, in category "Blog Achieve " - this has been read 3243 times
It is easy to write good content, explaining options and calculating annuity rates but it is much harder to deal with online advice
Posted by: billy burrows, on 16/09/13, in category "Blog Achieve " - this has been read 1578 times
Little did I know when I chose Peterborough Cathedral as the default postcode for my annuity tables in 2007 that this cathedral city would become the place where I would help run a specialist annuity business
Posted by: Billy Burrows, on 11/07/13, in category "Blog Achieve " - this has been read 5472 times
I must be getting old. It was while I was at the Money Marketing Retirement Summit in Cork last month that I realised just how long I have been involved with annuities and how much has changed over the years. Reflecting back on the changes some have been good, some have been bad and some have been both good and bad at the same time.
Posted by: billy burrows, on 14/06/13, in category "Blog Achieve " - this has been read 4455 times
Last Monday was revealing as I answered a number of telephone enquiries because we were short-staffed. I keep telling people I would not believe what is happening at the sharp end of this new world of direct-to-customer business if I did not experience it firsthand.
Posted by: billy burrows, on 7/05/13, in category "Blog Achieve " - this has been read 6558 times
I was thinking of an introduction for this article when I read a blog saying that Tesco is entering the annuity comparison market. This provides me with the perfect opening as I want to talk about a new paper that I have written looking at why people are not given more choice over their annuity options.
Posted by: Billy Burrows, on 18/02/13, in category "Blog Achieve " - this has been read 19791 times
There is absolutely no doubt that many people have benefited from the various campaigns to increase the awareness and availability of the open market option and so the recently announced FSA OMO review is to be welcomed.
Posted by: billy burrows, on 6/12/12, in category "Blog Achieve " - this has been read 11274 times
In the 2012 Autumn Statement the Chancellor announced that the maximum income for pension drawdown will increase to 120% of the basis amount which is normally called the maximum GAD income.
Posted by: Billy Burrows, on 8/11/12, in category "Blog Achieve " - this has been read 13089 times
Shopping for an annuity is easy? Or is it This month's article for Money Marketing's Reirement Strategy looks at the issues surrounding the Open Market Option
Posted by: Billy Burrows, on 8/11/12, in category "Blog Achieve " - this has been read 9621 times