Annuity rates take a breather

The annual annuity review produced by Investment, Life & Pensions Moneyfacts has revealed that annuity rates took a breather during 2006.

In contrast to the downward spiral that has plagued the pensions industry in recent years, annuity rates actually increased slightly in 2006.

The average standard ‘level without guarantee’ annuity rate for a male aged 60 using a purchase price of £10K increased from £583 in January to £585 in December, a rise of 0.34%. Female rates increased by 1.86%, up from £538 in January to £548 in December. Rates for males at age 65 have followed a similar trend to that seen at age 60, increasing by 0.91%, with female rates up by 1.33%. Although average rates slumped in the first quarter they clawed their way back to reach a high point in August before falling back slightly towards the end of the year.

The top male and female rates at both age 60 and 65 remained relatively unchanged, ending the year within 1% of where they started in January 2006. The one exception is the top male rate at age 60 which finally dropped from £615 to £599 (2.6%). The top rate has remained at or very close to the £615 mark since November 2004, possibly because of its position as a key price point within the annuity market.

The bigger picture

Although 2006 proved to be a more encouraging year for annuities the longer term picture remains bleak, with rates down a massive 42% since 1994. Our analysis below shows average rates for both males and females in respect of a £10K purchase price since December 1994 with the corresponding graph now splitting into three distinct sections. From 1994 through to the end of 1998 rates were in freefall, losing a quarter of their value in four years. The middle period between December 1998 and June 2003 saw rates initially increasing but then continuing on a downward slope, with male rates falling by a further 20% and female rates 17% over four and a half years. Since the middle of 2003, rates have followed a far less volatile path, losing just under 3% of their value.

Suzanne Greener, Deputy Editor of Investment, Life & Pensions Moneyfacts commented: “The rapid decline in annuity rates experienced during the nineties, compared with a more stable period from 2003 to 2006, is indicative of the way in which the annuity market has had to adjust to improving mortality rates combined with changes in the gilts market in terms of both demand and price. However, the range of rates on offer continues to highlight the benefits of shopping around. For a standard ‘level without guarantee’ annuity our research shows that male customers aged 70 can be up to 14% better off by selecting the best rate available. The increased income for those aged 60 and 65 can be up to 11%.”