Our research has shown that the best Annuity rate dropped by 3.56% during May.
Most Annuity providers, including Canada Life, Hodge Lifetime, Aviva, Just Retirement, LV=, Legal & General and Prudential, have reduced their best Annuity rates during the past month.
Annuity rate reduction in May
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The Investment Sense benchmark Annuity, which assumes a male aged 65, with a spouse three years younger, a fund of £100,000 buying a level Annuity paid monthly in arrears and with a 50% spouse’s pension, now produces an income of £5,515.92 per month, down 3.56% on the same time last month.
For the first time in 2012 Legal & General provide the best Annuity rate, knocking Aviva off top spot, the worst rate of £4,838.52 is offered by Aegon.
Over the past year our benchmark Annuity has fallen by over 11%, equal to £700 per year, mainly due to falling gilt yields.
Where now for Annuity rates?
In our opinion Annuity rates will continue to fall further for some time to come.
Why? There are a number of factors.
Firstly gilt yields continue to fall as beleaguered investors seek a safe haven for their money. Whilst this will help reduce the cost of government borrowing for George Osborne it does nothing positive for Annuity rates and if the Eurozone crisis continues we can expect to see further falls in gilt yields and therefore lower Annuity rates.
The Bank of England’s program of Quantitative Easing (QE) is also pushing down gilt yields. With inflation seemingly falling the Bank may well feel free to extend the QE program, creating further downward pressure on gilt yields and consequently Annuity rates.
Secondly, December will see the introduction of the EU Gender Directive, which will stop Annuity providers taking a retiree’s gender into account and is likely to reduce Annuity rates for men.
Thirdly Solvency II, another EU directive forcing insurers to hold more money in their reserves, is again likely to put further downward pressure on Annuity rates.
Is it all bad news?
No, whilst there is little you can do to buck the current downward trend in Annuity rates you can do everything to make the best of a potentially bad situation.
If an Annuity is the right option for you then make sure you shop around, use your Open Market Option (OMO) and check whether you qualify for an Enhanced Annuity.
There are of course other options, which you should explore, such as a Fixed Term Annuity, Income Drawdown or an Investment Linked Annuity. Whilst these may involve more risk than an Annuity, they could offer a more appropriate solution and need to be considered before you make any decisions.
Next steps
Our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income strategies for clients the length and breadth of the UK.
If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk
