Annuity Rates 2012

For those who are retiring this year, one of the main questions to address is ‘what will annuity rates be like in 2012?’ The short answer is probably lower than they were in 2011. According to some industry experts they could be as much as 20% – 30% lower. There are a number of reasons why annuity rates are likely to be lower this year.

Firstly the long term factors which impact on annuity rates are currently acting unfavorably towards rates increases. Interest rates currently stand at 0.5% and have been at this level for over two years now. Low interest rates mean smaller returns for savers and investors. This in turn puts downward pressure on gilt yields, which are the predominant method used for calculating level (conventional) annuity rates. Interest rates have been held at a low level to try and stimulate economic growth and keep the cost of lending as low as possible. However, some have argued that this policy is doing more harm than good, most noticeably SAGA Director-General and former government advisor Ros Altmann who wants interest rates to rise.

Aside from low interest rates, increasing life expectancy is another major factor which is likely to have an adverse impact on annuity rates in 2012. In short, people are living for longer and to fund this increasing retirement span, new annuitants will feel the effects of there being less overall money. Put simply if there are more people living for longer, the overall pot which annuity providers payout from has to stretch further and further. This chart plots how average life expectancy has increased in the UK over the past 40 years. Moreover some have estimated that 20% of people born today could live until they are over 100.

The ban on gender-based pricing for insurance products is another reason to be pessimistic about annuity rates next year. The official deadline for when insurers must stop using gender as a calculation when pricing products is the 21st of December 2012. However, many providers will incorporate the affects of the changes before then, in fact some may already have. The net result of the change in the law is expected to see male rates fall and female rate increase slightly. As 80% of annuities are bought by men for them and their partner if they have one, the overall affect will be that average ‘unisex’ rates will be lower.

In addition to these factors, new Solvency II laws resulting from a directive from the European Commission will mean that annuity providers will have to keep more money on their balance sheet to meet their liabilities. As with rising life expectancies, this will mean that there is less money to offer retirees in terms of retirement income. Tim Gosden from L&G put it’s blunty when he told pensions-management.co.uk that “…with Solvency II looming, annuity rates will drop.” The Directive will in theory only apply to annuities bought from 2012 onwards, so if you are planning on buying an annuity next year you might think you got there just in time. However as IFAonline points out…”…while in theory providers need do nothing until 2013, most may start to alter pricing gradually over the next 18 months to strengthen their reserves in anticipation of these changes.”