Annuity rates have fallen to record lows over the past few weeks leaving pension savers potentially worse off in their retirement.
The Investment Sense benchmark Annuity (Male aged 65, female aged 62, £100,000 non protected rights, level, no guarantee, 50% spouse’s pension payable monthly in arrears) has fallen by over 6% since the middle of the summer and the indications are that we may be in for further reductions in the months and weeks to come.
Using a pension Annuity calculator will help you see exactly what Annuity rate you could get right now for your specific circumstances.
Falling gilt yields
The trend in Annuity rates has been downward now for a number of years, caused in the most part by increased life expectancy. However the fall over the past few weeks is linked to the lower return insurance companies are getting on government gilts which they buy to back Annuity products.
Gilt yields have fallen as investors have moved money to the UK, which they see as a safe haven, this has caused gilt prices to rise, which in turn pushes down the yield.
Volatile stock markets have also been a problem for those people nearing retirement, who have not switched out of equities into safer assets. These people have been hit by a double whammy of reduced pension values due to falls on the stock market and lower Annuity rates.
We have often talked in the past of the importance of moving your pension fund to less riskier assets, perhaps a cash fund, in the months and weeks leading up to retirement, as way of insulating yourself against stock market falls. However many people still do not take this simple action leaving themselves open to the possibility of a lower pension fund at exactly the time they want to buy an Annuity.
The fall in Annuity rates and increased stock market volatility may encourage some pension savers to consider other alternatives rather than locking into an Annuity when rates are so low and pension valuations are depressed.
One option is to defer taking benefits, something which is discussed in more detail here.
However, if the income is needed now or there are no alternative sources of income then the pension fund will need to be used. In these circumstances it is perhaps worthwhile looking at other options other than an Annuity.
We recently looked at 10 ways to take money from your pension and whilst the Lifetime Annuity is likely to remain the most popular method of converting a pension into income, other options should be considered, especially at a time of such low Annuity rates and heightened stick market volatility.