Tide turns on rising annuity rates
Pensioners yet to take out an annuity product have been urged to think about doing so quickly, as rising rates seem to have hit a tipping point.
Annuity rates have been at a five-year high in recent months, but according to the latest figures from Alexander Forbes Annuity Bureau the tide has turned with seven providers cutting rates over the past month.
For example, Norwich Union has cut the annual annuity income for a 60-year-old male with a pension fund of £100,000 by £110 to £7,040.
Despite rates seemingly having reached the peak, Alexander Forbes says to today’s best annual income rate is still £275 higher than the best available one year ago.
David Marlow, director of Alexander Forbes Annuity Bureau, says falling annuity rates mean pensioners should make sure they exercise the Open Market Option and shop around for the best rate.
There are two main reasons for falling annuity rates. Firstly, the yields on corporate bonds - which insurers use to fund these retirement products – have fallen. Secondly, the 5% increase in annuity rates since the start of the year has left many providers with too much business to process.
However, the falling values also reflect the long-term outlook for annuities.
Laith Khalaf, pensions analyst at Hargreaves Lansdown, says increasing life expectancy means insurers have to pay out for longer, and as a result, annuity rates will have to decrease.
At the same time, more providers now offer enhanced rates to people with lower life expectancy - for example, smokers.
“This means the pool of money paying out your annuity income will be stretched among people with higher life expectancies, with the people you would want to share the money with (i.e. people likely to die younger) all plucked out into separate pools by insurers,” explains Khalaf.
Annuity rate changes August 2008:
|AEGON Scottish Equitable||12/08/08|
|Source: Hargreaves Lansdown|
Open market option
People who have a money purchase or defined contribution pension, at retirement must use their fund (minus an optional 25% as tax-free cash) to purchase an annuity. As the annuity market is very competitive and rates differ vastly between annuity providers on a daily basis, the open market option is your right to shop around and buy the annuity from the company offering the highest rates at that time.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.