Annuity rates hit six-month high

Average annuity rates have risen to a six-month high, with average incomes now 10 per cent higher than they were in March. By Lucia Greenwood

Annuity demand climbed 32 per cent in June compared to April, but it still remains 36 per cent below the level seen in 2013.

This recovery in demand in May and June follows April’s slump, which saw sales of single life annuities fall to their second lowest level on record. The average pot size also increased, rising to £67,504.

The gap between the best and worst rates available now stands at 81 basis points.

The average rate for a single life annuity reached a new six month high in June 2015 –  it now stands at 5.09 per cent, 23 basis points higher than rates seen in March, as improving economic data and an increasing likelihood of rate rises impacted gilt yields. 

As a result of the more positive outlook across both rates and average pension pot sizes, average incomes for those choosing to annuitise also rose by the end of the second quarter. In June the average income stood at £3,438, 10 per cent higher than that secured in March 2015.

IRESS executive general manager, commercial Dave Miller says: “Pensions Freedom Day hit annuity activity hard in April, as those at retirement rushed to explore alternative options. In the months that have followed, the mini-bounceback points to demand stabilising, buoyed by improving rates. However, with further changes in the market on the cards – not to mention new investment and hybrid products likely to launch – we have not seen the end of disruption and innovation in the retirement market.

“For those considering annuities, a rate rise bodes well, and as we head towards a more normal interest rate environment, we should see this trend continue in the longer-term. This will underpin demand from those looking for a form of guaranteed income.” 

Partnership corporate affairs director Jim Boyd Boyd says: “IRESS data suggests that while the overall demand for annuities has grown by 32 per cent in the quarter to the end of June the proportion relating to enhanced annuities illustrations has fallen back to 17 per cent. The overall effect of significant growth in illustrations and a smaller decline in the proportion relating to enhanced annuities implies that enhanced annuity illustrations have taken a modest fall.”

“The relationship between illustrations and future sales is complex with factors like multiple illustration requests per customer and conversion from illustration to sale influencing the overall level of sales.   Many people requesting annuity illustrations will be planning decisions months and often years in advance. Some will be obtaining illustrations solely for the purpose of advising on income drawdown. For these reasons we believe it is too early to be able to draw conclusions from illustration data during this period of change.”

Selectapension national accounts director Peter Bradshaw said: “A slight improvement in rates may have buoyed annuity demand in the last few months, but new retirees know that annuities are no longer the only game in town. At Selectapension we have seen a real shift in focus towards income drawdown. We have already witnessed a 174 per cent increase in the number of drawdown cases being analysed by advisers in the three month period following the pension freedoms, compared with the same period last year, and this increase in demand is set to continue.”