Despite some recent fluctuations, annuity rates have been falling steadily for the last decade, the Guardian noted back in 2008 that rates had “halved since the early 1990′s.” For potential annuitants, this is quite obviously a real problem, as their pension fund will convert into an ever decreasing amount of annual income. There are several reasons why rates have fallen..
Life expectancy
People are living longer and longer. Annuity payments are based on how long the annuitant will live for, which is why people with health and medical problems are normally offered higher rates. But with everyone on average living longer, rates are reduced to reflect the increased longevity.
Investment Returns
Insurance companies who offer annuities take the income from your pension fund and plough it into a number of investments. For a standard annuity, these will be government bonds (gilts). The amount of money they make depends on the yield value of these bonds. If the yield is high, usually when prices are lower, they will make more money and will offer higher rates as a consequence. However, because of the financial downturn in recent years, gilts have become more popular, thus driving up the purchase price. This in turn lessens the yield.
Solvency 11
These are new EU rules which will change the way insurance companies assess their liabilities. In short, they will have to keep more money themselves in order to prop up their own balance sheets. That means there will be less money to offer in annuity payments. As you can read in this article, some predict a fall in retirement income of 30% or more after 2012 when the new rules are applied.
Although the conditions for rates in the future are hardly favourable, an annuity is a secure and stable form of retirement income that will guarantee you an income for the rest of your life. And the number one reason why annuitants miss out on pension income is not down to adverse economics or new laws, it is because they did not shop around between providers.
