How will Annuity Rates fair 2012?
Annuity Rates in 2012 are, as many had predicted, lower than they were in 2011. A combination of lower gilt yields, increasing life expectancy and record low interest rates has led to rates continuing to fall. If you consider that the Bank of England’s base rate has been at 0.5% for well over two years and shows no sign of increasing then there is little evidence to suggest that annuity rates will increase substantially in 2012. The policy of keeping rates low has been criticised by some as being ineffectual as it discourages saving. However there is no doubt that the government will seek to maintain these low interest rates to help try and stimulate growth in the economy. Another reason why rates remain so low is because of the government’s own quantitative easing initiative which has pushed up the price of government bonds, thus lessening the yield. This, again, attracted criticism as it impacted directly on retirement incomes through lower annuity rates.
Apart from the economic factors helping to push down rates, another problem is that of longevity. There are more older people than ever and they are living for longer thanks to advances in medicine. 2012 is a bumper year for annuities, with almost 800,000 people retiring due to the post WW2 baby boom. The net result of more people retiring and longer life spans is that annuity providers will have less money to offer each individual in retirement income. The issue is only set to worsen in terms of income as life expectancy rises. For example, it is estimated that around one fifth of people born today could live until they are one hundred years old. Life expectancy has risen by five years in the last two decades alone, which given the number of people retiring each year makes a huge impact on what each individual can receive from an insurer in terms of annuity income.
Another reason rates have remained low is because of changes to EU law which prohibit the use of gender when pricing insurance policies, including annuities. The law itself does not come into force until December of this year but many observers predict that annuity providers may well start pricing annuities downwards well in advance of this deadline. The change in the law is designed to ensure there is equality in pricing between men and women when buying insurance products. However, the general consensus seems to be that male annuity rates will fall substantially whilst female rates will rise slightly. On the face of it it would seem fair not to use gender in this instance as this would discriminate against women by way of low annuity rates. However, if you consider the vast amount of annuities bought in the UK are bought by men for themselves and/or their partner/spouse then the end result of these changes is that most will see their annuity income fall as a consequence of the new legislation.
Finally, the last factor which is also damaging retirement incomes is that of Solvency II legislation. This compels insurers to keep higher capital adequacy ratios which, in plain English, means they have to spend less and hold back more of their own money in order to meet their liabilities and help prevent them going bust. Again this results in companies having less money to offer retirees in income as they are obliged to hold more back for themselves. This change in legislation does not become law until next year but as with gender pricing many expect providers to start thinking about their cash reserves well before this time.
