The average annual annuity income available fell by 6.3 per cent in the month following the EU referendum, leaving the UK with the ‘least competitive market ever’, according to Moneyfacts.
Conventional annuity rates are now at record lows and have declined by 12 per cent since the start of the year, as falling gilt yields and the impact of Solvency II are feeding into prices.
Enhanced rates fell by 4.9 per cent in the month following the Brexit vote, and are down 6.4 per cent from January 1, 2016.
The report shows that the average annual income from a level without guarantee standard fell by 3.4 per cent, based on a £10,000 purchase price during Q2 2016.
Competition for annuity business is at an all time low says Moneyfacts, with the gap between the highest and lowest rates falling in Q2 2016 from 16.1 per cent to 10.7 per cent. It has now fallen to just 9.2 per cent. The last time the gap fell below 10 per cent was after the EU gender underwriting took effect in 2013, when annuity providers adopted an ultra cautious approach to pricing until the market had settled down.
Moneyfacts says the reason that the gap between the most and least competitive annuities has closed significantly in recent months is that the market-leading rates have been cut more heavily than those at the bottom.
A further factor is the fall in the number of annuity providers active in the open market. The completion of the merger between Just Retirement and Partnership to create the JRP Group in Q2 2016 means the number of providers competing for pension annuity business on the open market has fallen to a new low of just 11, and has more than halved since 1994. Prudential’s decision to withdraw from selling annuities on the open market through financial advisers will further weaken competition.
Moneyfacts head of pensions Richard Eagling says: “The heavy gilt yield falls sparked by the EU referendum result and the more onerous capital requirement of the new Solvency II rules are having a dramatic and devastating impact on annuity pricing. Faltering competition within the annuity market has compounded the situation. The severe fall in annuity rates in Q2 2016 and in July have left many retirees facing a conundrum: they still want a secure sustainable lifetime income but are reluctant to annuitise at a time of record low rates.
“Some annuity providers currently do not want annuity business, so are effectively pricing themselves out of the market. A trend that is not conducive to encouraging competition within the annuity market is the significant number of retirees who are still not shopping around for the best rate. With the majority of annuitants remaining with their existing pension provider and not seeking expert financial help, the motivation for annuity providers to compete on price has been reduced.
“The reduced volume of annuity business and pricing challenges has meant that some annuity providers have been evaluating whether it is viable or attractive to play an active role in the market or whether they should concentrate on other product areas such as drawdown instead. Competition in the annuity market has never been weaker.”