Annuity rates at a two-year high
Annuity rates are now at a two-year high, having improved 12% since January, and by 6% in the third quarter of the year, according to MGM Advantage's annuity index.
The 6% quarterly rise was the biggest of its kind since the index launched in August 2009.
It means the average annuity today would pay 11% more in income than the equivalent available a year ago, or £6,111 in additional income over the course of someone's retirement (based on a £50,000 pot bought by someone aged 65).
The difference between the best enhanced annuity rate and worst standard annuity rate is around 38%, "meaning many people with health or lifestyle conditions could be missing out on thousands of pounds of income," according to MGM.
While up to 70% of people at retirement could qualify for a better rate because of a health or lifestyle condition, MGM found that only 6% of consumers who purchased an annuity in the second quarter of the year without taking advice purchased an enhanced annuity. This compares to 45% when advice is provided or people shopped around.
Aston Goodey at the company said: "Annuity rates have had a really bumpy ride, but we have seen a steady improvement this year with rates hitting a two-year high, largely driven by the returns available on bonds and gilts. This is great news for people looking to generate a retirement income, although it will always pay to shop around for not only the right shape of income but also the highest rate.
However, he added: "The increases we have seen this year need to be viewed relative to the record lows of 2012 and the overall trend of a decline in rates. The pressure on rates will continue due to SolvencyII, improving longevity and low returns on gilts and bonds, all of which will dampen down a recovery of rates in the near term."
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
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.