Our research has shown that Annuity rates have dropped for a third month in a row.
Last month our benchmark Annuity rate dropped by a further 1%, on top of a sharp fall in May of over 3.5%.
For the second month in a row Legal & General are the most competitive provider, with Aegon propping up the table, offering the lowest Annuity rate, down nearly 6% on the month before
When calculating our benchmark Annuity we use our own pension calculator and assume for a male aged 65 with a spouse three years younger, and looking to buy a level Annuity with a 50% spouse’s pension.
12% fall in Annuity rates over the past year
June marks the first anniversary of the Investment Sense benchmark Annuity, over that time rates have fallen by over 12% and apart from three months at the start of the year the trend has been depressingly downwards.
In June last year a male aged 65 could have produced an income of £6,212 from a pension fund of £100,000, just a year later that is down to £5,461, a drop of over £751 per year.
The fall in Annuity rates has mainly been due to the much publicised drop in gilt yields, resulting from the crisis in the Eurozone coupled with the Bank of England’s program of Quantitative Easing (QE), but where now?
Are there any reasons to think Annuity rates could rise soon?
The short answer is frankly. “no”, but let us explain why.
There are three factors conspiring to push Annuity rates still further. Firstly we have falling gilt yields, which are likely to continue to fall whilst the Eurozone struggles to find a solution to their problem and the Bank of England continue with their program of QE. Which is more likely to be extended following last week’s fall in the rate of inflation.
Secondly, we have the EU gender Directive coming into effect in December; this is likely to push Annuity rates down across the board but with men more affected than women.
Finally another piece of EU legislation, Solvency II, will force insurers to hold more capital in reserve, a move which is again likely to push Annuity rates still lower.
Our view is that Annuity rates have further to fall and are unlikely to start to rise until the Bank’s program of QE starts to unwind itself, which some experts believe could take up to five years, or a significant worsening in the world’s view of the UK as a safe haven.
Buy your Annuity now? Wait? Or take another option?
So with Annuity rates dropping sharply, what should people retiring over the next few months do? This is almost impossible to answer and very much dependent on your individual circumstances.
If you delay your Annuity purchase rates could continue to fall, you will also have lost out on income you would have had in the meantime. Alternatively, if you buy your Annuity now and rates rise sooner than expected, you could have been better off if you had waited.
Assuming you want to retire now and need the income from your pension, then delaying your Annuity purchase might not be an option for you. Indeed, for many people who want a simple and guaranteed income in retirement buying now might still make sense.
We would however urge you to consider all options, there are ways which can give you an income now, without the need to lock into today’s Annuity rates.
This is where advice can play such a crucial role, 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 firstname.lastname@example.org