2015 was a poor year for annuity rates, as low gilt yields and industry reforms took their toll on the market.
As rates continue to fall, policyholders may be questioning whether to start receiving their annuity income, or delay purchasing an annuity to see if their rate improves.
Predicting market trends is not easy, so knowing precisely when to invest and secure the best possible value from your pension plans is extremely difficult. Whilst we cannot predict what will happen in the future, there are a number of factors currently causing rates to fall, leaving some to ask the question: “should savers be annuitising sooner, rather than later?”
The latest effect on rates is Solvency II. This has set out new, stronger EU-wide requirements on capital adequacy and risk management for insurers, with the aim of increasing protection for policyholders. In short, annuity providers now must set aside a greater level of capital to support their future liabilities, which is already resulting in lower annuity rates.
Quantitative easing, too, has had a negative effect on annuity rates, as yields on gilts and corporate bonds (used to back annuity investments) fall as the government injects more money into the economy.
Furthermore, the impact of rising life expectancy in the UK has contributed to the lowering of annuity rates, as the capital sum on which an annuity is based has to pay out for a longer period. With the average life expectancy continuing to rise, the effect could potentially result in a lower income for future annuitants.
For those deferring their annuity purchase in the hope that rates will improve, it is important to consider not only the potential for annuity rates to change in that period, but also the loss of income during the deferral period. If rates were to rise, you could benefit from an increase in income; but if they were to continue to fall, you may be worse off than if you had purchased an annuity now.
Take for example, a 65-year-old man with a fund of £50,000 who is undecided whether to purchase his annuity today or defer the purchase for 12 months. If he buys his annuity today, his £50,000 fund would generate an immediate guaranteed annual annuity income of £2,774*.
If he waits a year, assuming his fund has increased by 5%, he would have a fund of £52,500 to buy his annuity. He is a year older, so should secure a better annuity rate, however annuity rates may fall over this period. For the purpose of this illustration, we assume that annuity rates have remained constant.
The combination of a higher fund value and being a year older means the annual income has increased to £3,090, however the client has not had the benefit of income in the first year (£2,774*).
Simple analysis shows that it would take nearly 9 years to recoup the lost cash he would have received in income from the immediate purchase option.
With rates continuing to fall, savers are being urged to ensure they get the best deal for their pension fund by shopping around for their retirement income.
Analysis last week showed a huge 17 per cent difference between the best and worst annuity rates, yet according to the Financial Conduct Authority earlier this month, 64 per cent of people who purchased an annuity between July and September last year did so through their existing provider**.
An annuity is still the only way to guarantee an income throughout your retirement, so searching for the best deal is crucial. To discuss your options and discover how much a retirement income specialist could secure for you, speak to a member of the team at Retirement Line today on free phone 0800 652 1316.
*Based on the best annuity rates offered via the Retirement Line system for a male aged 65, with a 50K fund, no guarantee, no tax free cash, postcode PE7 8JB. Figures correct on 25/01/2016.
**Financial Times 12/01/16