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Annuities still in the doldrums

I monitor annuity rates and bond yields on a regular basis and I was surprised and shocked to notice the GAD interest rate for July is 1%. This is the lowest level ever recorded since GAD was introduced in 1996.

The GAD rate is based on the yield for 15-year gilts and before pension freedoms it was important because it determined the maximum income from capped drawdown. Since then it has been mainly irrelevant because there are no income limits for flexi-access drawdown.

There is a useful table of GAD rates on the Royal London website/ .

The 1% GAD rate shows just how low gilt yields have fallen and this has had a knock-on effect on annuity rates because annuity rates are based on similar yields. .

In 2000, the GAD rate was 5%, during 2009, after the credit crunch, the rate fell to about 4% and by the end of 2012 it fell to 2%.

The lowest point for annuities was September 2016 in the aftermath of the Brexit referendum but even then, the GAD rate held firm at 2%.

See my popular annuity charts

So, what should we make of the lowest GAD rate ever?

Annuity rates are still low

First, it tells us we are still in the era of very low interest rates and just when I thought annuity rates couldn’t go any lower, they have fallen yet again. Annuity rates have not plummeted to the lows of 2016 but they are still at historically low levels. .

The benchmark annuity (£100,000, ages 65 and 60 with 2/3rds partner’s pension and level payments) currently pays £ 4,344 per annum compared to £ 3,823 per annum at is lowest ever point in September 2016. Annuities are not at rock bottom but a long way from £5,000 per annum last seen in the summer of 2015.

Income from drawdown

Secondly the low GAD rates remind us that the safe income withdrawal rate may be lower than many advisers think. There are many different interpretations of the safe withdrawal rate but if the GAD rate is a useful indicator of the sustainable income from drawdown, the safe withdrawal rate may be heading downwards.

Advisers who are still using the 4% rule as their starting point for safe income withdrawals should review this because although drawdown is an investment proposition it is always wise to use the income from annuities as a benchmark when working out much income to take.

It is simply impossible to predict what effect Brexit will have on future interest rates and bond yields but unless the economic and financial climate changes dramatically, it seems there is no end in sight to low annuity rates.

There is still a case for annuities

Finally, it is worth remembering that although annuity and bond yields are at low levels, there is still a case for investing in annuities to provide a level of guaranteed income. The case for annuities gets stronger with age which means that older drawdown investors should be encouraged to think about annuitizing part of their pension pot as the benefit of mortality cross subsidy becomes more attractive.

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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