Fall in rates on annuities and bonds hit savers and retirees

Fall in rates on annuities and bonds look set to disappoint savers and those looking to secure their income in retirement.

 Fall in rates

Falling bond rates are disappointing savers

A fall in rates on fixed rate bonds and on annuities are impacting savers and those who want to secure an income in retirement, respectively.

Annuity rates have collapsed to record lows leaving retirees with less than they could have hoped for according to Moneyfacts.co.uk. At the same time fixed rate bond providers are cutting or removing their products from the savings market.

Moneyfacts analysis shows that average annual pension annuity income has declined throughout much of 2019 and has intensified since August 2019 on the back of a sharp fall in gilt yields. This latest drop in annuity rates means that average annual annuity pension income is now 1.2% lower than its previous all-time low recorded back in September 2016, following the impact of the EU referendum result.

The average annual income payable on a single life standard level without guarantee annuity for a 65-year old has fallen by between 12.3% and 12.5% (depending on the purchase price) since the start of the year (table 1). For an equivalent enhanced annuity the reduction is between 10.2% and 11.4%. (table 2).

Table 1: Falling average annual pension annuity income since the start of 2019

Average single life standard annual annuity income
Age 65

(£10,000 purchase price)
Average single life standard annual annuity income
Age 65

(£50,000 purchase price)
1 Jan 2019£468£2,557
10 Sept 2019£410£2,237
% change-12.3%-12.5%

Figures show gross annual annuity income payable monthly in advance. Figures based on an annuitant aged 65 buying a single life level without guarantee annuity. Source: Moneyfacts

Table 2: Falling average annual pension annuity income since the start of 2019

Average single life enhanced annual annuity income
Age 65

(£10,000 purchase price)
Average single life enhanced annual annuity income
Age 65

(£50,000 purchase price)
1 Jan 2019 £529£2,701
1 Sept 2019£475£2,393
% change-10.2%-11.4%

Figures show gross annual annuity income payable monthly in advance. Figures based on an annuitant aged 65 buying a single life level without guarantee annuity. Source: Moneyfacts

Richard Eagling, head of pensions at Moneyfacts.co.uk said: “Although the demand for annuities has reduced substantially since the introduction of pension freedoms in 2015, it is still the only product capable of turning defined contribution pension savings into a guaranteed income for life.

“In the last few years, there has also been an increasing awareness of using annuities as part of a wider range of retirement solutions, typically to provide a baseline income from which to cover monthly living costs. As such, the security that annuities offer makes them an integral part of the retirement income landscape.

“However, the pricing trends at the time of annuitisation are critical to retirement income outcomes. Annuity rate risk, whereby individuals face the danger of locking into a low income at the time they retire, has always been a key retirement risk, but it has increasingly come to the fore again in recent months.

“Given the prevailing political and economic uncertainty, there are obvious merits in a retirement product that can guarantee a regular income for life – the question is whether current rates are still a price worth paying for the unique qualities that an annuity brings.”

During August 2019, the proportion of fixed rate bond providers overall that removed their products from sale or cut rates grew by 21% in just two months, now standing at 44%, up from 40% in July and 23% in June, according to Moneyfacts UK Savings Trends Treasury Report.

In June 2019, on longer-term fixed rate bonds and one-year fixed rate bonds, the proportion of providers to cut or withdraw deals was 21% and 12% respectively. However, the latest figures reveal that this has leapt to 40% and 30% respectively for August 2019.

This period of cuts has since taken toll on the returns on offer, with the average longer-term fixed bond rate (1.64%) falling to its lowest point since October 2017 (when it stood at 1.62%) and the average one-year fixed bond rate (1.34%) at its lowest level since August 2018 (when it stood at 1.32%).

Savings market analysis

 Sept 2018Mar 2019August 2019Sept 2019
Average one-year fixed rate bond1.40%1.47%1.37%1.34%
Average longer-term fixed rate bond*1.86%1.89%1.72%1.64%

*Longer term fixed bonds are those with terms over 550 days. Source: Moneyfacts Treasury Report

Rachel Springall, finance expert at Moneyfacts, said: “It’s a worrying trend for savers to see, but it’s clear as day that fixed rates are tumbling. The proportion of savings providers to cut or withdraw their fixed rates has grown twofold since June, now seen as a period of summertime sadness for the savings market.

“Savers who waited until September to grab a fixed rate bond will be disappointed to have missed their opportunity to get the highest returns, particularly on one-year fixed bonds, where the average rate has dropped to its lowest point since October 2017. If savers do now decide to invest, speed is of the essence because of the rate cut domino effect that is rippling through the top rate tables.

“Savings providers that sit in the top rate tables price their fixed rate bonds to gain attention, but if they feel they are getting inundated with deposits too quickly, they could not only cut their rate to ward off the hoard but withdraw the offer entirely, which we have seen occurring recently.

“Our data shows that even the challenger banks are playing their part with these cuts and withdrawals, however they remain within the top rate tables. This then demonstrates how the challengers are perhaps determined to remain in the mindset of savers by appearing highly in the market, but the brands may not wish to lead that very same market and fill their subscription levels too quickly.

“As it stands, rates may continue on the downward trend, but with economic uncertainties and concerns of the everyday saver, savings providers will need to keep a close eye on the market and react quickly to the relentless movements of their market position.”

Further reading: Bonds vs Equities in 2019 – Which to choose?

 

 

 

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