Annuity income falls for fourth consecutive year

Over the course of 2011 the average income generated by a standard level without guarantee annuity (based on a £10K purchase price) fell by 8.4% for a 65-year-old male and 7.7% for an equivalent female.

This was a sharper reduction than in 2010 when the average standard annuity rate for both a male and female fell by 2.7%.  

As a result, average annuity income has now fallen in each of the calendar years from 2008 to 2012. The last time that annuity income actually increased during a calendar year was 2007, when annuity payouts rose by 4.4% .

The market-leading rates available through the course of the year suffered a similar fate to the trend endured by the average rates.

Back in January 2011 the top standard level without guarantee annuity rate for a male aged 65 (based on a £10K purchase price) was £647 per annum.

Now the market leading rate is just £593 per annum, a reduction of 8.3%. The market-leading rates for an equivalent female, meanwhile, reduced by 8.2% during 2011.

Over the past 16 years a combination of falling gilt yields and improving mortality rates has seen annuity rates drop by a massive 48.3% for males and by 44.8% for females.

In monetary terms, £10K would have purchased an average standard level without guarantee annuity of £1,076 per year for a male aged 65 in August 1994 compared with £556 per year today.

Although annuity rates are now at an all-time low, it is also predicted further annuity income reductions are likely as annuity providers move towards the introduction of Solvency II and the implementation of neutral gender pricing following last year's European Court of Justice ruling banning the use of gender as a risk factor in rating insurance contracts.

Richard Eagling, Editor of Investment Life and Pensions Moneyfacts, said:

"Unfortunately, by increasing the demand for fixed income instruments such as UK Government Bonds, the ongoing Eurozone crisis and the Bank of England's Quantitative Easing programme have driven gilt and corporate bond yields down over the last twelve months, both of which underpin annuities.

"In the short term, a successful resolution of the European debt crisis is crucial to stabilising annuity rates."