Annuity rates flat in Q1

• Average annuity rates increased by less than 1% in the first quarter of 2014
• Difference between the best and worst annuity rates is 12% for the standard market and 7% for the enhanced market
• There is a 30% difference between the top quartile enhanced rate and bottom quartile standard rate

The latest MGM Advantage Annuity Index1 reveals average annuity rates increased by 0.83% in the first quarter of the year. The data reveals two distinct markets, with a 30% difference between the top enhanced rates and bottom standard rates. The gap between rates also evidences a two-tier market, with the difference between the best and worst enhanced rates at 7%, compared to 12% in the standard market.

Following the strong rise in annuity rates throughout last year, rates were flat in the first quarter of 2014. This is in part due to gilt yields, as well as the returns available on corporate bonds.

Given the uncertainty in the market at present, it is worth remembering that customers who are looking to secure a sustainable income for life face the same decisions as they did before the Budget, and are unlikely to get a different outcome now to post 2015. The cost of delay needs to be considered, as does the potential for annuity rates to go down in the future.

Considering your options at-retirement involves some complex decisions, with the recent changes making this arguably even more difficult. People looking to navigate their way through and create a sustainable income should seek professional financial advice.

It is clear the Budget will have an impact on rates going forward, although it is too early to call how this will play out. We are already seeing reduced demand as some people are postponing decisions until April 2015. This could drive annuity rates down. However, the competitive open market providers are likely to compete even more aggressively for business which might lead to tactical pricing decisions and improved rates for enhanced customers.

1.Annuity rates are based on analysis of data supplied by Investment Life and Pensions Moneyfacts to MGM Advantage (31 March 2014). The analysis looked at level annuities without a guarantee and income levels are based on a pension pot of £50,000 and a retirement age of 65. All rates are on a gender neutral basis. To create total retirement income figures the Index multiplied annual annuity income by 21 years in the case of men and 24 years in the case of women (at age 65). Enhanced rate figures are from a sample of smoker rates and enhanced rates based on health conditions. The Index bases its life expectancy figures on Office of National Statistics figures, using the cohort tables at age 65.

Source: MGM Advantage analysis of annuity rates from Investment Life and Pensions Moneyfacts. The average annuity is calculated from average standard and average enhanced rates.