The latest Annuity Index from MGM Advantage reveals the gulf in rates between the top enhanced rates and bottom standard rates is 30%. The Index also shows the average annuity rate has fallen in the second quarter of 2014, by 0.72%. The average standard annuity rate increased slightly (up by 0.42%) while the average enhanced rate fell by 1.64%.
Aston Goodey, sales and marketing Director, MGM Advantage, said: ‘For people looking for a sustainable retirement income this data shows it always pays to shop around when looking for your retirement income. People who don’t shop around could be missing out on thousands over the course of their retirement.
‘We are seeing the emergence of two distinct markets for annuities, with, for the first time, prices going in opposite directions for standard and enhanced rates. This divergence in rate could be down to any number of factors, including the different types of assets providers use to back their books for both standard and enhanced products, as well as tactical pricing decisions.
‘It is a tricky time for advisers and their clients, who are perhaps still wondering what to do following the radical Budget proposals. We need to get back to basics and understand what annuities can provide clients. If you are looking for a product to provide a retirement income for life, then an annuity is in the unique position of being able to provide 100% security for that income. Put simply, no other financial product is able to provide insurance of outliving your retirement savings.
‘We know that for many people the freedom and access available from next year will be hugely appealing, but, if your objective is to convert pension savings into retirement income, then an annuity is still the product with a guarantee attached that it will continue to pay income however long you live.
‘If people are watching and waiting to see what will happen next year before making any decisions, and their primary driver is a sustainable income, then our view is we will not see a treasure trove of new product innovation providing anything different from what is on offer today.’
Future annuity rates
Commenting on the future for annuity rates, Aston Goodey said: ‘The market has already felt some pretty hefty punches, most of which meant downward pressure on rates. The light at the end of the tunnel was the positive impact of future increases in interest rates and subsequent impact on gilt yields, which should help to push rates up.
‘However, the Budget changes these dynamics considerably. When demand for product falls, then prices tend to rise. We might also see the type of people who traditionally bought annuities change. People with smaller pots may take the money as cash, while people with longer life expectancy might securing an income through an annuity. The net effect on the annuity pool could be to put further pressure on rates. Although we haven’t felt the full effect of the changing market dynamics, annuity rates are likely to flat line for a while yet.’
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