Enhanced annuity income hit hardest since pension freedoms

The Moneyfacts UK Personal Pension Trends Treasury Report shows how 2017 proved to be a better year for standard annuity rates, despite a challenging pricing environment. Over the year the average annual income for a standard level without guarantee annuity for a 65-year-old increased by 1.07% based on a £10K pension pot, and by 1.66% for a £50K pension pot.

As a result, 2017 was the first calendar year since 2013 that standard annuity rates actually increased. This means that average annual standard annuity income has now increased by 13% since hitting an all-time low in September 2016 in the aftermath of the EU referendum result.

While annuity rates for individuals in good health fared well in 2017, the pricing trend was less favourable for those with health conditions or lifestyles that make them eligible for enhanced annuities. In fact, the average annual level without guarantee enhanced annuity income for a 65-year-old fell by between 4.8% and 5.8% depending on the purchase price.

At the higher age of 70, average enhanced annuity income fell by around 6.8%, while at age 75 the reduction was even greater at between 5.3% and 9.9%. Overall, average enhanced annuity income decreased in all but 17 of the 170 enhanced annuity scenarios analysed during 2017.

The fact that standard annuity rates edged up during 2017 while enhanced rates fell means that the uplift offered by an enhanced annuity is now greatly reduced. During Q4 2017 the average uplift fell from 16.7% to 12.1%, its lowest level since January 2013, when enhanced annuity providers adopted ultra-cautious pricing following the switch to gender neutral rates.

Since pension freedoms were introduced in April 2015, the average annual enhanced annuity income has fallen by between 10.2% and 14.2% for a 65-year-old (depending on purchase price) and by between 11.7% and 15.6% for a 70-year-old. By contrast, standard annuity income has fallen by between only 2.6% and 3.2%.

Richard Eagling, Head of Pensions at Moneyfacts, said:

“Before pension freedoms were introduced the enhanced annuity market was functioning well, with healthy competition ensuring typical uplifts of around 21%. However, it is difficult to escape the conclusion that the enhanced annuity market has been more adversely impacted by pension freedoms than the standard annuity market, meaning poorer retirement outcomes for those with shorter life expectancies retiring now than pre-April 2015. Nevertheless, it still remains the case that enhanced annuities offer valuable extra income for those who qualify for them, so they should not be overlooked.”