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Good news for retirees as annuity rates rally, but can they go higher?

Joanna Faith
Written By:
Joanna Faith
Posted:
Updated:
08/11/2016

Annuity rates are staging a mini revival after hitting record lows earlier this year.

Analysis by data firm Moneyfacts found the average annuity income for a 65-year-old man with a £10,000 pension pot has increased by 4.3% since hitting an all-time low in September 2016, taking rates back to levels last seen in late July.

The revival in rates follows a tough third quarter. Moneyfacts data revealed average annual standard annuity income fell by 6.4% and average enhanced annuity income by 10% in the three months to September.

Still a bad year

While rates have rebounded slightly in recent weeks, average standard annuity income is still down by 11.6% since the start of the calendar year, and average enhanced annuity income stands 15% lower, making 2016 the worst ever year for annuity rates.

Richard Eagling, head of pensions at Moneyfacts, said: “The already testing economic environment for annuity providers deteriorated even further during Q3 2016, as the impact of the EU referendum result and then the Bank of England base rate cut and extension of its quantitative easing programme triggered large falls in gilt yields.”

Insurers price annuity rates in relation to yields on gilts and corporate bonds and UK gilt yields fell to their lowest ever level of around 1% post-Brexit vote and even dipped into negative territory in late June.

Gilt yields have since recovered, providing annuity providers with more room to manoeuvre when setting their annuity pricing.

Eagling said: “We had reached a tipping point when annuity rates had fallen to such an extent that many retirees no longer regarded them as value for money, even though they provided the security they desired.

“Instead, retirees have been delaying annuitising until rates recover, or chasing higher yields through riskier alternatives.

“It will be interesting to see whether these latest annuity income rises are enough to convince them to return to annuities in order to fix their incomes for life.”

Will rates rise further?

The big question for people reaching retirement is do rates have further to go.

Nathan Long, a senior pension analyst at Hargreaves Lansdown, said: “For the annuity rate revival to be sustained we need to see gilt yields continue to rise, bearing in mind that we are currently yet to see them return to pre-Brexit levels.

“Gilt yields could improve in the short term if higher levels of inflation are expected in the UK but may also be impacted by any changes to US monetary policy following the election results.”

Long said a US interest rate rise, which could happen in December, may result in gilt yields and annuity rates being sent higher, “providing a much needed boost to those people in the UK who are approaching retirement and in need of secure income”.