Annuity Update December 2018

When will annuities bounce back?

The market has been waiting a long time for annuities to bounce back from historically low levels but despite a few false dawns, rates have remained stubbornly low.

The chart below shows the income from our benchmark annuity* (left axis) and the yield form our benchmark gilt** (right axis) over the last three years.

*The benchmark is a £ 100,000 joint life annuity for ages 65 and 60 with level payments and 2/3rds partner pension. **15-year gilt yield as quoted in the FT.

Annuities still in the doldrums

Annuities remain in the doldrums because the yields on corporate bonds, long dated gilts and other fixed interest investments remain very low following the quantitative easing (QE) policy introduced after the 2008 credit crunch. This just goes to show that pensioners have borne the brunt of the effects of QE.

Annuities fell to their lowest level in living memory in September 2016 following the unexpected result of the EU referendum. The benchmark 15-year gilt yield fell to nearly 1% and the benchmark annuity fell to £ 3,800 or 3.8%.

Bounce back

Annuities did improve quickly after the 2016 referendum and by December rates had bounced back but it took until December 2017 for rates to return the levels seen before the referendum.

The outlook for 2019

There are good reasons to expect annuity rates will increase in 2019 as interest rates are predicted to increase but this is exactly what I predicted at the end of last year and I was proved wrong.

Currently (20th December 2018) the benchmark annuity is paying £ 4,680 per annum gross for every £ 100,000 invested and the benchmark gilt is 1.6%.

In order for the benchmark annuity to increase to £ 5,000 per annum (5%) or more, the gilt yield will need to increase to well above 2% and there are no signs that this is in sight.

Therefore, for the time being, we can expect annuity rates to increase slowly but don’t expect and rapid or significant increases.

It's not all about annuities

The amount of annuity income is a product of the annuity rate and the value of the pension pot, so it is important to keep one eye on annuities and one eye on the stock market.

2018 was not a good year for the stock market because of the volatility caused by concerns about Brexit and fuelled by the consequences of Trump’s trade war with China. The stock market jitters may continue in 2019 unless there is a positive resolution to Brexit and the US market bounces back.

This means that anybody with a pension pot invested in the stock market either in the run up to retirement or invested in drawdown should review their investment to make sure they have an appropriate investment strategy and they are taking an acceptable level of risk.