After increases to Annuity rates in the first half of the year, prospective retirees, many of whom may have delayed their Annuity purchase in the hope of a higher rate, will be left disappointed if predictions that Annuity rates are set to fall come true.
Annually, around 400,000 people buy an Annuity with their pension. An Annuity provides retirees with a guaranteed income for life, although over the past few years a number of factors have pushed Annuity rates lower:
- Increased longevity, we’re all living longer
- Low interest rates
- Falling gilt yields
Which way for Annuity rates?
However, over recent months, as gilt yields have started to rise from rock bottom levels, Annuity rates have also picked up slightly. Which has led to some would-be retirees delaying their Annuity purchase; a decision they may come to regret if a prediction from a group of respected economists comes true.
Capital Economics has predicted falling inflation will cause “downward pressure” on gilt yields until early 2014, which could, in turn, push Annuity rates down again.
A fall in gilt yields of 0.5% has been predicted by the economists, which would see a cut in Annuity rates of 4 – 5%, if previous trends are repeated.
Retirement experts have also suggested that Solvency II, a piece of EU legislation which will force insurers to hold more capital in reserve, could also push Annuity rates down.
Delaying an Annuity purchase
The prediction from Capital Economics comes in the same week as research which calls into question the benefit of delaying an Annuity purchase.
The figures, from MGM Advantage, show that if Annuity rates remain unchanged, a two year delay would take between 37 and 41 years to recoup the ‘lost income’.
The case for delaying an Annuity purchase would therefore seem to be weak, although experts point out there are reasons why it can be sensible for some, as we have explored in a recent article, which can be read by clicking here .
Furthermore experts also point out that there are many other ways if turning a pension into an income, which do not involve the potentially tricky decision of when to buy an Annuity. These other options include:
- Income Drawdown, now known as Capped Drawdown
- Fixed Term Annuities
- Investment Linked Annuities
- Phased Retirement
- Flexible Drawdown, subject to certain qualifying criteria
Of course every individual retiree’s circumstances are different and advice should be sought from an Independent Financial Adviser (IFA) to confirm the best course of action.