We began charting the best annuity rates available on 27th May 2003. We’ve looked at how buying secure pension income compares now with 15 years ago. The last 15 years has seen a seismic shift in how we leave work and draw income from our pensions. Contributor Nathan Long, senior pension analyst at Hargreaves Lansdown.
Annuities allow retirees to buy themselves a guaranteed income for the rest of their life. Many people crave the peace of mind this brings, especially if they don’t have other sources of secure income when work stops. Retirement can last an awfully long time, with many twists and turns along the way. New trends of flexible working do not exactly dovetail with the certainty and security of an annuity, but annuities remain invaluable in later life and we expect to see many retirees buying annuities at older ages.
The golden rule is to ensure you have at least sufficient secure income to pay the bills in retirement, whether that be from an annuity, a final salary pension or the State Pension. If you need to top up by buying an annuity ensure you confirm all of your health information, it won’t make your income lower and could make a significant difference to your retirement.’
The open market annuity then and now
Taking the ‘open market option’ allows the transfer of the pension you have built up to your choice of insurer. This means that rather than being stuck with the rates offered by your own provider, you can move to the insurer who will offer you the highest income based on your personal circumstances.
Back in May 2003 a 65 year old man could convert a £100,000 pension pot into an annual, non-increasing income £7,337. Back then the Bank of England base rate stood at 3.75 percent, a 65 year old man could expect to live until 81 and a woman to 84.
Today, with the base rate at 0.5 percent, a 65 year old can buy an income of £5,445. A 65 year old man is expected to live to 83 and a woman to nearly 86. This means interest rates have fallen by 86 percent, 65 year old men can expect to live 14 percent longer, 65 year old women 9 percent longer and annuity rates have fallen 26 percent. Interest rates are important. If they go up, this normally has a knock on impact to send Gilt yields higher. The annuity companies buy Gilts to pay their income promises, the upshot of which is that annuity rates also improve.
The highest annuity income was available in July and August 2008 in the grip of the financial crisis where pay-outs for a £100,000 pension reached £7,855. The lowest pay-out available was £4,495, recorded in September 2016.
Data from the ABI shows that back in 2003 the average annuity purchase was £21,703, the latest data from 2016 shows a leap to £58,100. Whilst pensions are certainly more popular than they were, and we have had a booming stockmarket for a prolonged period of the past 15 years, the key reason for this increase is that post pension freedom many of the very small pension pots are taken as a lump sum instead of being used to buy a tiny annuity income. Back in 2003 we estimate that 31 percent took advantage of the open market option, it is currently 52 percent according to data from the ABI. In their review of the annuity market the FCA found 80 percent of people could get a better rate by shopping around for the best rate.
The rise of enhanced annuities
Enhanced annuities were a niche product 15 years ago, providing higher rates only for those who suffered from serious ill health. Improvements in the underwriting capabilities of insurers means annuities are now far more tailored based on someone’s health. No longer are enhancements granted only for serious conditions. Common conditions like high blood pressure and high cholesterol will give you a boost. Even the amount of alcohol you drink and your height and weight will increase the pay-out. ABI data shows that a third of annuities were enhanced for health in 2017, compared to 2 percent in 2003. Hargreaves Lansdown’s own data shows more than half of people qualify for an enhanced annuity, with an average uplift in their income of 17 percent.
The most competitive providers over time
Friends Provident offered the top rates on 27/05/2003 when our annuity index kicked off. The company became Friends Life in March 2011 and were then later taken over by Aviva in April 2015 at which point they stopped selling annuities, although Aviva are still a provider of secure pension income. The most consistent annuity provider has been Canada Life. They’ve offered table topping rates on 281 occasions during this time, Hodge Lifetime were second with 183, with Legal & General coming in third with 97. Interestingly, L&G have topped the best buy rates for 71 of the last 75 weeks. Back in 2003 we estimate there were 14 annuity providers quoting on the open market, whereas now there are just 6.