Make the right call on your annuity purchase with our experts’ Q&A
Annuities pay a guaranteed income for life. However, with that income being locked in on the day you make your purchase, prevailing annuity rates stand to make a big difference to your long-term financial security.
Get the low down on what’s happening to annuity rates and what the future holds in store with the latest from our experts.
1) What has been happening to annuity rates over the last year?
Andrew Tully, pensions technical director, Retirement Advantage:
“Annuity rates have had a hard time as markets adapt to our decision to leave the EU. Rates hit an all-time low in the months after the June referendum vote, largely because of the significant falls in government bonds, or gilts. The good news is since then the low yields have been on their way up again and are back to pre-Brexit levels, while annuity providers are also pricing to attract business. These two factors are driving rates back up.”
Ros Altmann, pensions expert:
“Following the Brexit vote, gilt yields tumbled as people turned to what were perceived as safe assets during such a time of uncertainty. The fall in gilt yields meant that annuity rates worsened, giving people even less pension for their money than ever before.”
Billy Burrows, director, Retirement IQ:
“The annuity chart over the past 12 months has been U-shaped with marked reductions immediately after Brexit with rates falling to a low in September 2016. Since then rates have bounced back but they have fallen away again over the past few months.”
2) What do you expect to happen to annuity rates, both in the short and long term?
“The continuing pressure on rates comes from people living longer, although there is evidence this trend is slowing. While we all come to terms with Brexit and the change in US presidency, yields on gilts are likely to be volatile and remain so as we negotiate our exit from the EU.
Gilt yields remain fairly low and it is difficult to see how these yields and investment markets will respond as we move through the Brexit process. There is light at the end of the tunnel in the form of clarity around insurers’ capital positions from Solvency II, which means providers know exactly how much capital they need to hold to sell annuities, removing any uncertainty, while competition in the market is also likely to help rates. But this still all combines to make the outlook for rates uncertain.”
“Nobody can predict with certainty what will happen to annuity rates, either in the short term or long term. However, the probability of annuity rates improving from current exceptionally low levels must be greater than the probability of them getting still worse. If there is economic dislocation during the Brexit process, given the already high level of government debt, there is a not insignificant likelihood that gilt yields will increase, as markets fear the economy will be less able to support the current level of borrowing.”
“Currently rates are stuck in the doldrums and there is no sign of the awaited post Brexit bounce. Yields on 15 year gilts are hovering around the 1.6% mark and it will take a return to 2% yields before we see any significant rise in rates.”
Tom McPhail, head of pension policy at Hargreaves Lansdown:
“For as long as the current interest rate environment prevails, it’s unlikely annuity rates will improve significantly. The only other things which could move the dial are a significant increase in mortality (not necessarily a good thing) or a significant easement in regulatory controls on the security of annuity reserves (also not necessarily a good thing).
“As to when interest rates will rise, given the UK's levels of indebtedness, and the fragility of growth, it is hard to see a Chancellor or Bank of England governor pushing for a rise any time soon.”
3) Annuity rates move so frequently, is it ever worth trying to time the market?
“You can think about buying an annuity in stages, rather than banking all of your pension on one rate on the day. Of course people will need to think about how they can generate an income to pay the essential bills and create enough flexibility to protect their pension from any nasty surprises. These are tall orders, but it is possible to choose an appropriate level of guaranteed income using an annuity and leave any balance of the pension in drawdown to create the flexibility. You can then buy further tranches of guaranteed income using the drawdown pot as you get older, or if your circumstances change.
“There are also some simple steps people can take to maximise their income. Never accept the offer from your pension company and always shop around in the open market, the difference in income can be significant, especially over a typical retirement horizon. Always tell your pension company if you have a health or lifestyle condition, for example diabetes, or if you smoke. You will likely qualify for a higher income through an enhanced annuity. Also, consider getting professional financial advice. The adviser will ensure you have the most appropriate annuity (or combination of annuity and drawdown) for your individual circumstances, as well as finding you the most competitive rate.”
“I would not recommend timing annuity purchase with a view on interest rate trends short-term, but I would suggest that timing annuity purchase to make sure you don’t lock in to current low yields when you are still relatively young might be worth considering. Many people buy annuities too early in their life, and then find their health suddenly deteriorates. Waiting till you are rather older can make sense.”
“Annuities still have a useful role as the only policy that can guarantee lifetime income. There is a growing body of expert opinion and academic research that shows that as people get older the case for annuities gets stronger. In practice this means that everyone who is taking pension drawdown should be considering purchasing annuities as they get older and want to de-risk their pension income.”
“It is rarely worth trying to time the market, once you've made a decision to buy an annuity, just get on with it.”
4) Fewer providers are now selling annuities. Should this be cause for concern for consumers?
“The annuity market remains competitive, with providers changing rates on an almost weekly basis. This is not only in response to investment markets but also providers pricing to gain market share. Annuities have also received a quiet makeover with providers offering longer income guarantees (up to 30 years) and 100% capital protection, removing one of the key stigmas about annuities – the insurer keeps my money if I die early. Now people can be sure than no matter what happens they and their family will get value from their annuity. Despite the pension freedoms and choice now available, people continue to value the certainty that only a guaranteed income can provide.”
“The number of providers is probably less important than consumer understanding of what to look for. When buying annuities, consumers need to understand a number of important things.
a. Do they understand the mortality pooling aspects and longevity insurance that annuities entail?
b. What type of annuity they need – in other words, is it single life or joint life, do they need inflation linking etc.
c. Do they want any guarantees, such as 10 year or money-back guarantee?
d. What their state of health is? If they buy a standard annuity, the price will reflect an expectation that they are in excellent health, indeed that they may be expected to live longer than average. If they have any reason to believe their health is not tip-top, they may want to find a different type of annuity that is priced according to their health status.
e. It is possible to work out how long the annuity company might expect them to live to, based on expected returns on their money. I have a button on my blog www.pensionsandsavings.com that actually allows people to check their annuity quote and, for a single life product, see what age they would need to live to in order that their annuity pays them more than they would have received from investing the lump sum now. They will need to enter an assumed investment return and the calculator will then show them the age beyond which they will potentially be ‘in the money’. If they die before that age, then the insurer will keep some of their unused fund (again depending on the assumed investment return).”
“There is still a competitive market although there are fewer providers. At current levels this is not an issue. However, it may become one if volumes of annuity sales increased, as there may be a shortage of supply.
“The shrinkage in the market is a little worrying; we want healthy competition. I think the annuity market may grow again in time but we're some way off at the moment.”