Annuity rates fall in response to Brexit
Annuity providers have begun to reduce rates in response to the referendum result and the subsequent drop in gilt yields.
It emerged this morning that both Just Retirement and Retirement Advantage have implemented rate cuts that will see annuity purchases receive a lower level of income.
Moneywise warned on Friday that annuity rates could fall following the Brexit result.
How much are rates falling by?
Andrew Tully, pensions technical director at Retirement Advantage says: “We’ve reduced our annuity rates by 3% as markets adjust to the UK leaving the EU.”
This will see a healthy 65-year-old with £100,000 lose around £150 a year. On Friday they would have got an income of £5,087 a year, but today they would get just £4,937, according to figures from the company.
In Just Retirement’s case, the reduction is around the 2% mark.
Should I buy an annuity now?
Tom McPhail, head of retirement policy at Hargreaves Lansdown says he expects more providers to follow.
“Gilt yields and annuity rates have been dropping steadily over the past year. The events of the past couple of days have given new momentum to that trend. For any investor planning to buy an annuity in the immediate future, it may make sense to do so sooner rather than later”
He adds: “As always, make sure you shop around for the most competitive terms for your personal circumstance before committing to a deal. If you want to delay purchasing an annuity, but need to draw on your pension savings, then look at drawing an income from your funds using a drawdown arrangement instead.”
What if I already have an annuity or recently obtained a quote?
The news will not affect retirees with annuities in payment as this income is guaranteed. You should also not be affected if you have recently received an annuity quote as most providers guarantee quotes for between two and four weeks.
What has Brexit got to do with annuities?
In order to pay annuities insurance companies invest in gilts – loans to the government, which pay a fixed rate of interest.
These are considered to be ‘safe haven’ investments and as such are more popular during periods of volatility in the stock markets.
Following Friday’s referendum result and the subsequent turbulence on the markets, demand for gilts increased pushing their price up and therefore the yield investors receive, down.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
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.