The summer is normally a quiet time for Annuities, not this year, rates are dropping and the stock market, where huge amounts of pension savings are held, is volatile to say the least.
Any basic Annuity rates comparison shows that over the past few years the trend has been downward, this is in the most part down to falling gilt yields and increase longevity; we are all living longer.
We speak to large numbers of potential Annuity purchasers and many are concerned about the right time to buy their Annuity and whether rates will ever start to rise again. In light of recent events we thought we would take another look at this subject.
So, why have Annuity rates dropped recently?
The highest income for our benchmark Annuity (male age 65, female aged 62, £100,000 non protected rights, level, no guarantee, 50% spouse’s pension paid monthly in arrears) has fallen by 5.80% over the past two months. You can get figures specific to your circumstances by using a pension Annuity calculator.
The main reason is that gilt rates have fallen significantly in recent weeks.
Insurers use gilts to back their Annuities and partly as a result of the recent crisis in the Eurozone the UK is being seen as something of a safe haven. When demand for gilts rise, so does the price, which in turn pushes down the yield, reducing what the Annuity providers can pay out.
The table below shows just how far UK gilt yields have fallen in recent months.
Whilst falling gilt yields will put a smile on the face of George Osborne, it is not such good news if you are just about to buy an Annuity. As a guide a 0.5% fall in gilt yields means a 5% fall in Annuity rates, so far insurers seem to be cutting their rates slowly, but with such a fall in gilt yields we can expect further reductions in Annuity rates soon.
Indeed The Retirement Partnership, who offer a range of free services and information on retirement issues to Independent Financial Advisers, have said in a recent article “In conclusion, those intending to purchase an annuity in the near future may be counselled to do so before insurance companies cut annuity rates again.”
Is there any reason to think Annuity rates may suddenly start to rise?
The answer here must be a qualified “no”, in fact there are two further issues, both linked to the EU, which could see Annuity rates fall further.
The first of these is a piece of legislation known as Solvency II, which essentially is forcing all European financial institutions to increase their financial reserves, which could mean lower Annuity pay outs.
The second reason is a European Court of Justice (ECJ) ruling banning gender discrimination when setting, amongst other things, Annuity rates. At present women live longer than men, they therefore get lower Annuity rates, but from December 2012 insurers will no longer be able to use gender when deciding the Annuity rate they can offer. The exact effect this ruling will have an Annuity rates is unknown at present, however it is highly unlikely insurers will raise female Annuity rates to the same level as those offered to men, it is more likely that rates for men will fall and we see a slight rise for women; although this is far from certain.
Insurers tend not to like sharp changes to Annuity rates so expect to see the effects of both of these factors be phased on over the coming months. Indeed there is some anecdotal evidence that insurers are already starting to price in Solvency II and the ECJ ruling into their current rates.
We believe there are currently very few reasons to think that Annuity rates may start to rise in the short term. Of course if gilt yields were to rise, for example if UK debt became less attractive to investors we might see Annuity rates start to rise. There is also the competition factor, insurers want you to buy their Annuity, but on the whole we can see very few reasons which would push up Annuity rates in the short term.
Is there anything I can do to help?
You could look at other retirement income options, more of which in a moment, but if you require a guaranteed income for the rest of your life then an Annuity is probably your only option. There is little you can do to buck the current downward trend in Annuity rates but there are still a few things you can do which might help.
Firstly, as you approach retirement consider moving your pension fund away from equities into less volatile Cash funds, whilst you will not benefit from any rise in the stock market it will mean that you are not affected by future falls, the like of which we have seen in the past few weeks.
Secondly, always shop around for the best Annuity rate. Use your Open Market Option (OMO) and compare rates from a wide range of Annuity providers, including of course your existing pension company, to see who is offering the best rate. A pension annuity calculator can help here, as can an Independent Financial Adviser.
Finally, check whether you qualify for an Enhanced Annuity, which gives higher levels of income to people suffering from ill health or have lifestyle issues such as smoking, which mean a potentially shorter life expectancy and therefore a better Annuity rate. Always check whether you qualify for an Enhanced Annuity, even relatively minor complaints, which you don’t give a second thought to on a day to day basis can increase your income.
I don’t want to lock into today’s Annuity rates, but I need income, what are my other options?
You could consider a Fixed Term Annuity, which gives you an income for a set period of time, generally three to 10 years, at the end of which you are given a Guaranteed Maturity Value which you can then use to purchase another retirement income product of your choice. Fixed Term Annuities tend to be used by people who do not want to lock into a Lifetime Annuity now, perhaps because they believe Annuity rates will rise in the future or they may qualify for an Enhanced Annuity in years to come.
Income Drawdown is also another option, although the recent reduction in gilt rates and changes to legislation are also having an effect on the levels of income which can be taken here. Furthermore Income Drawdown carries investment risk which is not the case with a Lifetime Annuity.
Investment Linked Annuities are also available, again though these carry investment risk.
If you would like to consider other options then we would naturally recommend speaking to a suitably qualified and experienced Independent Financial Adviser. Our team is here to help you with any retirement queries you may have, they can be contacted on 0115 933 8433 or by emailing firstname.lastname@example.org