An often asked question about pension annuities; might UK pension annuity rates fall in the near future? Might UK annuity rates plumb new depths? After the recent Budget statement in June, there was a lot of noise about the Chancellor having abolished the need to buy an annuity by age 75. Although, strictly speaking, this ‘rule’ already no longer exists, the reality is that the options for flexibility about how retirement income can be taken are quite limited.The two main factors affecting the pricing of conventional annuity rates are the investment return on corporate bonds and how long the client is expected to live in retirement, together with how much to charge for that guarantee. These are all influenced by changes in the stockmarket and by regulation.
The implications of Solvency II are also already having an impact on UK pension annuity rates, and this, combined with increased longevity, means it’s possible that guaranteed pension annuities will become more expensive to buy in the future. But by how much? That is the quetion. To explain, Solvency II is forthcoming European legislation that includes the development of a risk-based financial framework for insurance companies, and one of the possible outcomes is that it may lead to lower pension annuity rates.
Some experts have suggested UK pension annuities rates may fall by between 10% and 20%, based on the picture that has emerged previously. The situation will continue to evolve over time, with lobbying and political debate in the UK and Europe, but at the moment the eventual outcomes are actually uncertain. While several different scenarios are being assessed, what is certain is that this debate will continue throughout 2010 and probably well into 2011. The date for implementation of Solvency II has now been put back a little to 1 January 2013. The change to annuity rates already appears to be partially factored into the annuity market, though there may be further to go.
