Annuity Rates on the Rise

Recently, we have seen annuity providers increasing their annuity rates. Can this trend continue?

We take a look at the various factors behind annuity rates to determine how annuity rates might develop during 2013.

Why have annuity rates fallen so much in the last few years?

The most significant factor for annuity rates are gilt yields. The gilt yield is a measure of the annual income that will be received from the gilt.

As interest rates fell on deposit accounts and returns from the stock markets weakened due to poor economic performance investors moved their money into safer and higher paying gilts, pushing up the price of the gilt which in turn lowered the gilt yield.

The result is lower annuity rates

Life expectancy

This is another factor that affects annuity rates. We’re living longer on average so annuity payments have to last longer. This results in lower annuity rates.

Shift in annuity rates due to health

Depending on your health you may see a rise or fall in annuity rates. The annuity pool is splitting between healthy and unhealthy lives. Even postcodes will now affect annuity rates, since people in the north have statistically shorter life expectancy than those in the south. Those classed as ‘impaired life’ are paid a higher annuity because it is expected to be paid for a shorter period. There is nothing wrong with this but it means that annuity rates will fall for ‘healthy’ people.

Gender Directive

The European Court ruled that annuity rates cannot be determined by gender. We all know that women live, on average, longer than men so they were paid less but for longer. Now they have to be paid the same as men, the affect is to raise women’s annuity rates and reduce men’s rates. Depending on your sex, you may have seen annuity rates fall or rise on or around the 21st December 2012.

Why have annuity rates improved recently?

There is an expectation of interest rates increasing and the economy improving at some point in the future. As this unknown date gets ever closer money flows out of gilts and into other investments in anticipation of better returns. We have seen the stock market improve significantly during the last quarter of 2012 and the first few months of 2013 – some of the money that has flowed into the stock market probably came from gilts, pushing the gilt price down and the gilt yield up leading to higher annuity rates.

Where are annuity rates heading?

Predicting the movement in annuity rates and deciding whether or not to defer an annuity purchase is beyond the scope of this article. The trend in life expectancy is expected to continue but the effect is not as great or immediate as changes to gilt rates. So, what’s your view of the economy; will it improve, deteriorate or languish for many more years?

If you’re bullish on the economy then expect annuity rates to steadily improve. If you’re negative then annuity rates may fall back. Will it languish for years to come, then expect no significant upward movement in annuity rates?

image depicting calculator results

To help you predict future annuity rates and decide whether or not to defer an annuity purchase we have created a unique ‘cost of delay’ annuity calculator. Have a play and see what conclusions you reach.

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