Pension Annuity calculators show that rates have recovered slightly so far this year but if you are retiring soon, don’t get too excited!
The latest figures from the MGM Advantage Annuity Index, show average Annuity rates increased by 3% in the first three months of 2013, the first quarterly interest for two years.
However, the good news soon comes to an end, with revelation that over an average retirement of 18-years, a pension fund of £50,000 would now provide £10,224 less income compared to an Annuity bought just 24 months ago.
So where now for Annuity rates?
Despite the small rise over the first three months of the year, there is real concern the rise is temporary, following a short lived increase in gilt yields at the start of the year, and rates could fall still further over the next few months.
If Annuity rates do fall, the main culprit is likely to be Quantitative Easing (QE). The Bank of England has already injected £375 billion into the UK economy through QE and most experts expect this to be extended during the next few months.
Put simply, QE increases the capital value of gilts, which then reduces their yield, forcing insurers who have to use gilts to back their Annuities to cut rates.
Aston Goodey, Distribution and Marketing Director at MGM Advantage, said: “The continued Eurozone uncertainty will continue to apply pressure on UK gilts, and with the recent Budget confirming the prospect of further quantitative easing, Annuity rates are likely to continue bumping along the bottom for a while to come.”
Annuity providers have also been affected by falling yields on Corporate Bonds, again as a result of QE, and Solvency II, a piece of EU legislation, which is likely to increase the amount of money insurers need to hold in reserve, further reducing their scope to increase Annuity rates.
Reasons why Annuity rates may rise?
Some commentators had suggested that as a result of the UK losing its AAA credit rating gilt yields could fall. However, this hasn’t happened, since late February when Moody’s became the first rating agency to downgrade the UK’s economy, the 15 year gilt yield has actually fallen by around 0.40%; dashing hopes of an immediate rise in Annuity rates.
As a number of recent media reports have highlighted, Annuity providers are making significant profit margins, which could leave them scope for short term rate rises. However, whilst the cost of Solvency II still unclear, it has to be doubtful whether providers will reduce margins and push up rates.
So, will Annuity rates to rise, fall further, or stay the same?
We’d broadly agree with MGM’s Aston Goodey, when he says: “We think the last quarters’ price moves are more about providers repositioning themselves following the introduction of gender neutral rates rather than a sustained rally of rates.”
With the exception of some providers pushing up rates slightly, as they jockey for short term positions, we can see no fundamental reason why Annuity rates will rise during 2013.
In fact, if we get significant further injections of QE into the economy, it is possible Annuity rates could fall even further.
Remember though, it isn’t all about the Annuity rate!
There’s no getting away from the fact that Annuity rates are important, after all, a lower rate means a smaller pension income. However, there are equally important questions, which are often overlooked by retirees, in their tireless pursuit of the best rate.
If you are approaching retirement, you should ask yourself some fundamental questions.
Is an Annuity the right product in the first place? Retirees should consider at all options, including Income Drawdown, Fixed Term Annuities, both of which will allow you to avoid locking into today’s low Annuity rates. Alternatively an Investment Linked Annuity could be used, which, according to MGM Advantage, requires “as little as a 3% return is required to match the best Conventional Annuity.”
Should you take the tax free lump sum? If you plan to take a lump sum but then invest it to provide an income, you should consider the benefits of a Purchase Life Annuity (PLA) , which may give a higher income. Furthermore combination of Conventional Annuity and PLA will certainly give a better return than using 100% of your pension fund to buy a Conventional Annuity.
How should your Annuity be constructed? Do you want to inflation proof your income? Include benefits for your spouse or guarantee periods? All of these things need to be considered so that you get the right Annuity for your needs.
Only an Independent Financial Adviser (IFA) can advise you the full range of options and give you access to all Annuity providers. Furthermore, our research shows if you go direct, or use a non-advised Annuity broker, the commission you pay will probably be no more than the fee charged by your IFA.
Indeed, in some cases, the commission you pay for a non-advised service could be a lot more than the fee charged by an IFA.
Aston Goodey, again: “Many people will be wondering what, if any, options they might have. As always, seeking professional financial advice is a good starting point.”
This point is taken up by Julian Knight, Personal Finance Editor of the Independent , who said in a recent guest blog, written exclusively for Investment Sense: “The majority of people should seek advice when purchasing an Annuity. Not to do so could severely impact their retirement.”
You can read the full article by Julian Knight by clicking here .