6 September 2012 last updated

Impaired annuity rates reduce over 2% by providers

Providers have reduced impaired annuity rates by over 2% even though gilt yields have actually increased in September. Gilt yields have increased this month with the 15-year gilt yields up 8 basis points. Despite this impaired annuity rates have been reduced beyond the fall in yields making annuities poor value for pensioners retiring now. Annuity rates are based on gilt yields and an 8 basis point increase would roughly translate into a 0.8% increase for impaired annuities. With rate decreases last month it is possible for annuity income to increase by a further 3.1%. Standard pension annuity providers reduced their rates last month by up to 3% and as gilt yields improve there is more opportunity for providers to offer better rates. However, they can be slow to do this as providers will benefit with larger profit margins at the expense of pensioners.

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Pensioners losing as annuity rates remain low

Impaired annuities offer enhanced income based on an individuals medical conditions. There are over 1,500 medical conditions on most providers list with more being added every week. The enhancements vary depending on the severity of the condition from 10% more than standard annuity rates for lifestyle conditions such as high blood pressure and Cholesterol to 20% for diabetes and up to 50% for more serious illnesses such as cancers and heart conditions.

The 15-year gilt yields increased by 8 basis points to 2.15% with solid gains in equities as Mario Draghi announces the European Central Bank (ECB) bond-buying plan to help reduce the cost of sovereign debt. The FTSE-100 index was 119 points higher at 5,777, the Dow Jones 244 points higher at 13,292 and Europe was up between 2.2% to 4.9%. These increase will help pensioners invested up to the point of buying their impaired annuity as their funds will have increased with improving markets.

As impaired annuity providers wait for other to make the first move at improving rates pensioners are losing out with lower annuities. For example a 65 year old male with a fund of £100,000 on a single life level basis with a 20% enhancement could receive £6,895 pa. With the annuity correctly reflecting current gilt yields this could be £7,108 pa or £213 per annum more paid each year over his lifetime. If providers can resist increasing rates this difference can be retained by the provider and in the current market they are being very cautious about increasing annuity rates although very quick to reduce rates.