Annuity rates predicted to continue falling for some time with new regulations set to reduce rates by up to 20%

News - Funds

Written by Ray Clancy

Tuesday, 20 April 2010 08:19

Annuity rates are continuing to shrink with those approaching retirement needing greater exposure to stock markets to offset the decline, it is claimed.

According to the MGM Advantage Annuity Index, which tracks the income paid on standard and enhanced annuities, rates have continued to fall over the last quarter, albeit at a slower pace.

Between December 2009 and March 2010 annuity rates fell 0.58%, compared to 1.64% between June 2009 and November 2009. The average rates on standard annuities fell by 0.50% in March compared to 2.16% in November, and on enhanced by 0.65% in March compared to 1.33% in November.

‘We expect that annuity rates will continue to fall for some time, especially with the introduction of new regulation such as Solvency II that could reduce rates by up to 20%. We strongly believe that those approaching retirement need to consider maintaining exposure to the stock markets in order to potentially generate better returns and negate the impact of inflation,’ explained Craig Fazzini-Jones, Director at MGM Advantage.

With regard to standard annuities, the difference between an average standard and enhanced annuity rate has remained near on the same at 22.7% for men in November to March and 22.6% for women. For the first five years of retirement, this would mean a difference of £3,663.30 for a man buying an annuity with £50,000, and £3,404 for a woman.

Further highlighting the importance of shopping around for the best possible annuity rate, the Index also reveals large disparities between the income paid on top quartile and bottom quartile products for both standard and enhanced products.

On a £50,000 pension pot, MGM Advantage warns that on average men who chose a bottom quartile enhanced annuity could find themselves £2,297.60 worse off over the first five years of their retirement. The corresponding figure for women would be £2,237.40.

Across the standard and enhanced annuity market as a whole, the difference between the top and bottom quartiles continues to widen for men but has reduced slightly for women. In November, the average difference for men was 34.7% and this rose slightly in March to 34.9%. The corresponding figures for women are 34.12%% and 33.8%.