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The Actuary The magazine of the Institute & Faculty of Actuaries

Annuity rates up 3% in first quarter of 2013

Annuity rates increased by 3% in the first three months of the year, the first quarterly increase in the purchasing power of a pension pot in two years, MGM Advantage said yesterday.


The latest quarterly figures from the retirement adviser’s Annuity index reveal that, over a typical 18-year retirement, a man retiring at 65 in March 2013 with a £50,000 pension pot would receive an average of £2,875 a year, giving a total income of £51,750 over their retirement.

This comes after seven successive quarters of declining annuity rates, which meant the average annual payout for a 65-year-old man retiring with a £50,000 pension pot fell by 11.7% over the course of 2012. In the final quarter of 2012, it stood at £2,786 a year.

Aston Goodey, distribution and marketing manager at MGM Advantage, said that while the figures for the first quarter were good news for retirees, they were unlikely to indicate a steady increase in annuity rates.

‘This is some much-needed good news for people looking to retire and convert savings into income,’ he explained.

‘However, there is a sting in the tail as annuity rates are still very low and likely to remain so for some time to come. Some of the factors affecting annuity rates, namely low gilt yields, returns on corporate bonds and Solvency II will continue to apply downward pressure on annuity rates.

‘We think the last quarter’s price moves are more about providers repositioning themselves following the introduction of gender neutral rates rather than a sustained rally of rates.’

MGM Advantage noted that, on average, a man retiring aged 65 with £50,000 retirement savings last month could expect their annuity to buy over £10,000 less than someone in the similar position just two years ago, when this pension pot would have paid out £61,974.

Goodey added: ‘The continued eurozone uncertainty will continue to apply pressure on UK gilts, and with the recent Budget confirming the prospect of further quantitative easing, annuity rates are likely to continue bumping along the bottom for a while to come.’

MGM Advantage’s figures also highlight the potential for retirees to increase their income by purchasing enhanced annuities, where the rate of payout is tailored according to someone’s lifestyle or medical condition. According to MGM, up to 70% of retirees could qualify for an enhanced annuity.

Its figures for the first quarter show that while the average conventional gender-neutral annuity would pay out £2,665 a year, the average enhanced annuity would pay out 16% more at £3,086 a year. Over the course of a man’s average 18-year retirement, this amounts to £7,578 more retirement income, while over a woman’s average 21 years in retirement, it amounts to £8,841.

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