19 Apr 2024

Annuity income suffers biggest fall since 1998

New research by Investment Life and Pensions Moneyfacts has revealed that the average annual income generated by a standard annuity for a 65-year old male fell by 11.5% during 2012. This is the biggest annual fall since 1998, when annuity income fell by an average of 13.7% (see Table 1 below).

The equivalent annuity income for a female dropped by 6.1% in 2012, a fall that was cushioned by the uplift that females received on the switch over to gender neutral pricing from 21 December 2012.

Table 1: Average Annual Change in Pension Annuity Income since 1998 (Source: Investment Life and Pensions Moneyfacts. Figures based on a male aged 65 purchasing a standard, level without guarantee annuity)

Calendar year	Average annual change in annuity income
1998	-13.7%
1999	1.8%
2000	-0.8%
2001	-6.0%
2002	-11.1%
2003	-2.3%
2004	-2.5%
2005	-3.0%
2006	1.3%
2007	4.4%
2008	-2.2%
2009	-8.7%
2010	-2.7%
2011	-8.4%
2012	-11.5%

Richard Eagling, Head of Pensions at Moneyfacts, said: “Sadly, it is fair to say that 2012 has proved to be another poor year for annuity rates. Record low gilt yields sparked by further Quantitative Easing and uncertainty over the Eurozone combined with the switch to gender neutral pricing led to a high volume of repricing amongst annuity providers throughout 2012. The result of this activity has been a fifth consecutive year in which average annuity income has fallen.”

Average annuity income has now fallen in 15 out of the last 18 calendar years. Overall, the average annual annuity income for a male aged 65 years old has fallen by 56% since Moneyfacts first started to research annuity rates back in August 1994, whilst the equivalent income for a 65-year-old female has reduced by 50%.

Impact of switch to gender neutral rates

Table 2 below compares the average annual income payable on pension annuities both before and after providers switched to unisex rates as part of the EU Gender Directive. The figures are based on a purchase price of £50K.

As the table highlights, the move to unisex rates has seen the average annual income payable on a standard level without guarantee annuity for a male aged 65 fall by 2.7%, from £2,690 to £2,617. The income payable on other types of annuity for a 65- year-old male have seen slightly lower reductions: 2.6% for a level guaranteed five year annuity, 2.4% for a RPI-linked without guarantee annuity, 2.1% for a level guaranteed 10-year annuity and 1.8% for an escalating 5% per annum without guarantee annuity.

Females, widely predicted to be the big winners in the new gender neutral landscape, have certainly benefited, although the average uplift they have witnessed in many cases mirrors the reductions seen by their male counterparts. For instance, the average annual income payable on a standard level without guarantee annuity for a female aged 65 years old has increased by 2.9% from £2,542 to £2,617.

Generally speaking, the impact of gender neutral pricing has been less pronounced for joint life cases. Where joint life annuities are priced on a no reduction on first death basis there has been very little change unless an escalation option is chosen. Meanwhile, joint life annuities reducing by one-third on the male death have fallen by between 0.2% and 0.8% depending on the options selected.

Richard Eagling, Head of Pensions at Moneyfacts, said: “As to the future direction of annuity rates, it is fair to say that the full impact of the switch to gender neutral pricing has yet to play itself out. It is still very early days for the new pricing model and in the short term a period of considerable flux is anticipated as providers look to readjust their rates during the first quarter of 2013 in order to drop themselves back into the strategic pricing positions they favoured before gender neutralisation. This process is already underway, with several providers making price adjustments within a short period of introducing their gender neutral rates.”

Table 2: Single Life Standard Annuity – Average annual pension annuity income pre and post G-Day. (Annuity rates based on £50K purchase price)

	Single Life Male age 65 Pre G-Day	Single Life Male age 65 Post G-Day	Change
Level without guarantee	£2,690	£2,617	- £73
Level guaranteed 5 years	£2,680	£2,610	- £70
Level guaranteed 10 years	£2,644	£2,587	- £57
Escalating 5% pa without guarantee	£1,376	£1,350	- £26
RPI Linked without guarantee	£1,645	£1,605	- £40
	Single Life Female age 65 Pre G-Day	Single Life Female age 65 Post G-Day	Change
Level without guarantee	£2,542	£2,617	+ £75
Level guaranteed 5 years	£2,536	£2,610	+ £74
Level guaranteed 10 years	£2,515	£2,587	+ £72
Escalating 5% pa without guarantee	£1,263	£1,350	+ £87
RPI Linked without guarantee	£1,558	£1,605	+ £47

Moneyfacts Group

Moneyfacts is the UK’s leading independent provider of personal financial information and our data is used and trusted throughout the financial industry.

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