Majority of annuity experts expect rate to fall over the next five years

News - Banking

Written by Ray Clancy

Monday, 13 September 2010 08:09

Annuity rates in the UK are expected to fall for the next five years making certain options less attractive, according to new research.

Some 82% of leading independent financial advisor annuity specialists expect rates to fall over the next five years, according to the report from MGM Advantage.

One in four expect them to decline by between 7.5% and 10% over this period, but nearly one in five, some 18%, expect a fall of over 10%. Only 9% said that they did not expect annuity rates to decline between now and 2015, with 2% expecting them to rise.

‘There is a lot of pressure on annuity rates at the moment, including increased life expectancy and Solvency II, which will require insurers to keep back more capital,’ said Aston Goodey, sales and marketing director at MGM Advantage.

‘If rates do fall, conventional annuities will become less attractive and a greater focus will be placed on asset backed annuities. This is one of the main reasons why earlier this year, we launched our Flexible Income Annuity, which is an asset backed product offering the flexibility to change income levels at different stages of retirement and the potential for growth and therefore the possibility of negating the impact of inflation. It also provides a minimum income guarantee and death benefits,’ added Goodey.

MGM Advantage’s research also reveals that 91% of the IFAs interviewed expect the asset backed annuity market to grow over the next five years. One in three, 32%, expect it to grow by between 10% and 20%, and 38% expect growth of between 20.1% and 100%. Some 14% expect growth of over 100%.

The findings reveal that 47% of IFAs interviewed believe that falling conventional annuity rates will be the main factor behind the expanding asset backed annuity market, followed by rising longevity, 21%, and inflation 14%.

The company believes that the flexibility of the product and the fact that the minimum investment is £10,000 means it is suitable for the majority of UK consumers who are willing to accept an element of investment risk on some of their pension savings, providing they have a minimum income guarantee to rely on

It says is also offers a choice of starting income between 50% and 120% of the income that would be available from a conventional annuity and the flexibility to vary income at key stages of retirement to meet lifestyle needs

There are also enhanced terms for customers with a health impairment. ‘Because we are a mutual, membership of the Society and the potential for extra income from member bonuses, without the need to invest in a traditional with-profits fund,’ it said.