New EU legislation which forces financial institutions to hold back more capital on their balance sheets could slash annuity rates by as much as 20%, according to a new report from Deloitte. Rates for annuities have dropped by over 11% in the past three years alone but the introduction of Solvency II could send them crashing once again. Deloitte say at best they will fall by at least 5%, but could fall by as much as 20%, slashing retirement incomes for millions of pensioners. For a retiree with a pension fund of £100,000 this could mean a fall in annual income as high as £1,167.
The new rules come into force at the beginning of 2014 and force insurers to invest more money into government bonds which are seen as a safer bet compared with corporate bonds. However shifting from corporate bonds to gilts will reduce the potential return for insurers and thus will result in lower annuity incomes for retirees. Gilts have already suffered over the past three years because of the Bank of England’s policy of quantitative easing, which has pushed up the price of these bonds, thus reducing the yield. Solvency II will be another nail in the coffin for retirement incomes at a time when they can least afford to take another battering. Dr Ros Altmann, Director General of SAGA and campaigner for the over 50′s says that QE has caused huge damage to pensioner incomes, a point that is rejected by some at the Bank of England. She says that…”…quantitative easing has forced gilt rates down so pensioners are getting less in retirement for the money they have spent their whole lives saving.” She added that Solvency II would further drive down pensioner incomes which was another piece of bad news for UK retirees. She also said that the government should “stand up” for UK pensioners.
As well as the new rules impacting those coming up the retirement, experts also believe they could dissuade younger people from saving for retirement. News stories about poor value pensions will do nothing to encourage people towards pension saving. Instead the news is likely to increase interest in pension alternatives such as purchasing a buy to let property or using ISA’s. For male annuitants this is a double blow as it comes at the same time as the introduction of new rules banning gender pricing which have again forced rates downwards. At the moment men are offered better rates as they on average die sooner compared with women. However new rules from the EU ban gender pricing for insurance premiums which will result in men being offered lower rates. The irony is that the vast majority of annuities purchased by men are for them and their partner/spouse, meaning that overall most households will see a fall in income. Only single women are expected to benefit from the changes.