Annuity rates go into Brexit freefall
Annuity rates are continuing to plummet following the UK’s shock referendum result.
Within days of the UK voting to leave the EU, Moneywise reported that both Just Retirement and Retirement Advantage had taken the decision to reduce the amounts they are able to pay new retirees.
But two weeks later, more providers have followed suit, with Hargreaves Lansdown reporting 14 rate reductions since Brexit.
This means the best rate for a 65-year old has fallen by 3.59%, with £100,000 now buying an income of just £4,890 a year.
Taking these most recent cuts into account, annuity rates are now 37% lower than they were eight years ago. In July 2008 a 65-year old with a £100,000 could purchase an income of £7,855 – a whopping £2,965 more than today.
As a result of falling annuity rates, Tom McPhail, head of retirement policy at Hargreaves Lansdown says 65 is the new 60. “Just six months ago in January 2016, someone five years younger could get a better deal than a 65-year-old today; a 60-year-old in January with £100,000 could have bought an income of £4,930. This means they would potentially receive five years’ of extra income paid at the same rate as a 65-year-old today.
Why does Brexit affect annuity rates?
Annuity providers have been forced to reduce rates because the investments they use to fund retirees’ income have been hit hard since the UK’s decision to leave the EU.
Andrew Tully, pensions technical director at Retirement Advantage, says: “Annuity companies price against the returns available on assets including corporate bonds and government gilts. Since the vote to leave the EU we have witnessed gilt yields fall to new historic lows. This has clearly hit annuity rates, and unfortunately we expect the current volatility to continue in the short term.”
Should I put off buying an annuity?
Mr McPhail agrees that the outlook remains uncertain and that those retirees that want an annuity should not necessarily delay their purchase.
He says: “Annuity rates are disappearing off the bottom of the chart. Even though rates are now at historic lows, there is no certainty whether or when rates will go back up again. It is also important to note that in recent years, anyone who decided to delay buying an annuity may well be worse off today.”
Mr McPhail adds: “So if the question is, ‘should I buy an annuity today?’, then the answer is don’t delay doing so just because today’s rates are lower than in the past.”
According to Hargreaves Lansdown a retiree who had bought an annuity in July 2008, aged 65, paying £7,855 a year would have received an income of £62,840 to date. However if they had invested that money in the average balanced managed fund it would now be worth £158, 960. Aged 73 this would buy them an income of £10,138. This is £2,283 a year more than they would have had if they had annuitised back in 2008, but they would have to live to the age of 100 to recoup the income lost over the first eight years.
Mr Tully says that these issues put people retiring today in a very difficult position. He suggests retirees use a mix and match approach. “Rather than just buying an annuity when rates are so low, it makes sense to consider choosing a mix of annuity and drawdown. Annuity provides the guaranteed income to pay the bills, while the drawdown pot can be used to boost income, invest for the longer term or be used in the future to purchase more guaranteed income when rates improve.”
He adds: “As always, never accept the annuity offer from your pension company, it will most likely pay to shop around for the best deal for your personal circumstances.”
Retirees income expectations too optimistic
The news comes as research from Saga Investment Services reveals that Britain’s over-50s need double the pension they think they need to generate the income they’ll need once they retire.
The survey asked over-50s to estimate the income they would need to cover a range of lifestyles and how much pension or savings they would need to deliver that income.
To cover the ‘essentials’, respondents said they would need an income of £15,200 a year in retirement and estimated that this could be achieved with a pension worth an average of £143, 830. However according to Saga, this pension would only generate a guaranteed income of £7,940 a year with an annuity – a shortfall of almost 50%.
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.