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Update May 2018

Annuity Update May 2018

As I review annuity rates at the beginning of May 2018 I am struggling to say anything new because there has been little meaningful change to rates over the last few months except for relatively small changes to some rates when yields have changed.

Little has changed

Annuity rates have been stuck in a narrow band for the last 8 months with the benchmark annuity rate (£100,000 for joint life 2/3rds, ages 65 and 60 with level payments) paying between £ 4,400 and £ 4,650 per annum gross. This means the maximum change over the last 8 months has been around 5.5% or an extra £ 250 per annum for every £100,000 invested. As a well-known supermarket says ‘every little helps’ but such a modest increase hardly signals a change in fortunes for annuities.

There should be no surprise at the relative stability in the annuity market because, the benchmark 15-year gilt yield has only moved slightly within the narrow range 1.6% to 1.9%. I have previously said that yields will need to go higher than 2% before meaningful increase happen but there are no signs that yields will move higher at the moment.

See my week by week changes to annuity rates and gilt yields.

My predictions were wrong

At the beginning of the year I was optimistic that yields would rise resulting in increased annuity rates and therefore annuities would become popular. I also predicted that drawdown would become less attractive, especially for those with smaller funds, if there was a fall in equity prices.

It seems I was wrong on both counts as annuities have stayed in the doldrums and despite the fall in equity prices towards the end of January, there is no sign that advisers or their clients have less of an appetite for drawdown, despite the market correction earlier this year.

Conclusions

I still think the outlook for annuities rates is positive and rates will eventually return to levels where they will give drawdown a run for its money. However, yields will need to increase by a good margin before this happens.

I use the 15-year gilt yield as quoted in the FT as the benchmark for monitoring annuity rates. Currently it is in the range 1.7 to 1.9%, but it will have to increase to well over 2% before we see meaningful increases in annuity income.

This begs the question; “what is a meaningful increase”? At the moment the best rate for my benchmark annuity (£100,000 for joint life 2/3rds, ages 65 and 60 with level payments) is £ 4,617 from Canada Life. I think an annual gross income of more than £ 5,000 per annum is needed.

The last time the benchmark annuity was over £ 5,000 was August 2015 when the benchmark yield was 2.3%

So anybody waiting for significantly higher annuity rates shouldn’t hold their breath as it may be long time coming.

Finally, annuity rates may be slow to increase, but equity markets could be quick to fall if something dramatic were to happen in the world. This means that drawdown investors should ensure they are not taking undue risk and should make sure their portfolios are invested in such a way as to protect against the possibility of a sudden market downturn.

About the author

Billy Burrows

Billy Burrows has been involved with retirement options for over 20 years, advising clients on all aspects of pensions and retirement income options.

He divides his time between advising individual clients as Retirement Director at Better Retirement and running Retirement IQ, which publishes guides including the popular ‘You and Your Pension Pot’ and ‘The Retirement Journey’.

He is frequently quoted in the national press and appears on radio, podcasts and videos and writes extensively on retirement income matters.

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