Budget 2013: Annuity incomes to fall on the back of more Quantitative Easing?

Despite small rises in Annuity rates over the past few weeks, yesterday’s Budget has dashed hopes that the trend will continue.

Pension Annuity comparisons show that during February at least five Annuity providers have increased their rates, including a 3% rise from Aviva.

However, gilt yields have dropped since their peak in the middle of February and there was more bad news yesterday, when in his fourth Budget, the Chancellor George Osborne, announced that the Bank of England’s programme of Quantitative Easing (QE) would continue.

Falling Annuity rates

Quantitative Easing reduces the yield on gilts, which insurers use to back their Annuities; therefore when gilts yields drop, so do Annuity rates.

The Bank of England’s programme of QE started in March 2009 and since then it has purchased £375 billion of gilts. Although the minutes of the Monetary Policy Committee meetings show members are split over when additional QE should be introduced, it is clear that an extension of the programme is very much on the cards in 2013; bad news for anyone buying an Annuity during the course of the year.

Reacting to the news, Andrew Tully of Annuity provider, MGM Advantage, took to Twitter, saying: “More QE will keep gilt yields down and keep annuity rates near all-time lows.”

Income Drawdown also affected

Perhaps the most popular alternative to an Annuity, Income Drawdown, is also affected by falling Gilt yields.

Retirees who chose Income Drawdown, also known as Capped Drawdown, as an alternative to an Annuity, have the maximum income they can take each year capped. This cap is set by the Government Actuary’s Department and is therefore known as the GAD rate. The GAD rate is linked to Gilt yields and unsurprisingly, when they fall, so does the GAD rate and consequently the income available through this method.

There is however some relief on the horizon for Income Drawdown investors. Firstly the government has reversed a previous decision to reduce the maximum income available from 120% of the GAD figure to 100%. Therefore new retirees who enter Income Drawdown on or after 6th April 2013 will have the potential to take a higher income. Existing Income Drawdown investors will also be able to benefit from the higher cap at their next annual review.

Secondly, following lobbying from the Association of British Insurers (ABI) it was announced in the Budget that the government has commissioned a study looking into the way GAD rates are calculated. At present they are pegged to the 15 year gilt yield, however the ABI prefer a different benchmark, combining both long term corporate bond yields as well as gilt yields.

Shopping around for the best Annuity rate

There are many things would-be retirees can do to increase their income, the most basic of which is shopping around for the best Annuity rate.

Too many retirees simply take the Annuity offered to them by their existing pension provider and fail to look elsewhere or consider whether they qualify for an Enhanced Annuity, which can provide a higher income by taking into account any medical or lifestyles issues, such as high blood pressure, raised cholesterol or smoking, which can reduce life expectancy.

To try and counter this problem a new code of conduct was introduced earlier this year by the ABI, which will force pension companies to encourage retirees to shop around; only time will tell whether this will work.

Our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk