With the continued decline of annuity rates is it reasonable to expect them to recover at some point or must we now accept that rates are low and will stay that way?  Well to answer this we firstly need to look at what has driven rates over recent years.

Longevity: It is a very pleasing fact that generally we can expect to have a longer life than that of our parents.  This is due in part to overall healthier lifestyles and in part due to advances in medical science.  Whilst this is a satisfying statistic, it does impact on the rate a provider of annuities is prepared to offer as they now expect to be paying these policies for longer than they ever have before. This is something that is not expected to change so there is no potential for rate increases here.

The Annuity Pool: All pensioners that bought an annuity had their money effectively pooled together, this meant in practice that a healthy individual’s money would be grouped together with people who were not so healthy and had a shorter life expectancy.  An annuitant would benefit from the money of those who died early and left their fund in the “Annuity Pool”. 

Specialist annuities are now available for those with shorter than average life expectancies, giving them a better rate to reflect. This is more than fair; however it has greatly reduced the effect of the annuity pool. Again, this is not something that we would expect to change so no potential for rate increase here either.

Gilt Yields: There is an un-doubtable link between Gilt Yields and annuity rates, gilts have always been the benchmark for annuity rates and they are currently trading at an all time low.  This is fuelled by uncertainty in financial markets which is cause by the Euro Zone debt crisis, it would be reasonable to assume that these can only fall so far and we may well be seeing rates close to the bottom now.  So, as the green shoots of recovery start to show, the long term gilt yields should in turn start to show more positive numbers.  Should this happen, annuity rates are expected to follow.  This is a positive outcome but it may take several years to take effect.

Conclusion: There are several factors that have forced annuity rates down such as the reduction in the annuity pool and average life expectancy increasing, these are facts that are not likely to change and it would be unrealistic to expect annuity rates to ever return to the figures we have seen in the past.  However, the effect of the debt crisis and falling gilt yields cannot be overlooked, these rates will recover at some point and will have a direct effect on annuity rates, but it is likely to take some time for this to take effect. So for 2013, expect rates to remain low.

Contact us for more advice about annuities and how to get the best out of yours.