At our recent Best Practice meeting (we hold them on a regular basis to update ourselves on change) I posed the following question:
“What reasons can you give for annuity rates being so low?”
In light of the proposed changes introduced by the Chancellor in his Budget statement – Freedom and choice in pensions – the annuity market has taken something of a nosedive.
A lot of comments have been made about the annuity market being broken and certainly many consumers have been less well served by the insurance sector than they deserve, but consider the following answers that we came up with.
1) QE – quantitative easing introduced by the government in the form of printing (electronically) more money. This money was primarily used to buy back government debt in the form of Gilts.
Gilt prices therefore went up (demand and supply in action) Gilt yields (the income return on the investment) fell sharply Gilt yields are an important determining factor in the level of annuity rates;
2) EU Solvency II – policy that told financial institutions to set aside more capital to cover off any guarantees that they had. So more capital set aside meant annuity rates are lower than they need be;
3) ECJ ruling – European Court of Justice ruled that pricing of insurance (including annuities which are a form of insurance) must not discriminate between men and women. Stupidly our government “rolled over” and allowed the material fact that women tend to live long than men to be removed from the pricing process;
4) Impaired Life – the creation of a separate pool of impaired life annuities means that some of the “mortality profit” (part of an annuity rate is made up of the fact than some annuitants don’t live as long as expected and that gain can be shared with the other annuitants) is removed and this exerts further downward pressure on the annuity rate;
5) Improved Life Expectancy – on average we are living longer. Go on, have a guess what that means to annuity rates?!;
6) Fewer people are buying annuities – and again this means lower mortality profit to be shared amongst the others typically because those buying annuities expect to live long enough to get good value for money.
All of these points will have an impact upon annuity rates it is just much easier (but a bit lazier in thinking terms) to blame annuity providers and claim that they are making unacceptable profits from annuitants.
Do get in touch if you are approaching retirement and need advice to select the most suitable pension income option.
