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Annuities Pension Drawdown Fixed Term Plans

Blow for pensioners

Blow for pensioners as bond market rally hits annuities

This was the headline for a story in the Financial Times – see - Blow for pensioners as bond market rally hits annuities

These are the notes I provided for the FT

Annuities are very expensive

Annuities are very expensive at the moment which is another way of saying the rates are very low. The reason is simple; gilt and bond yields have fallen through the floor and annuities are priced with reference to bond yields. The yield on 15 year gilts was over 1.6% a year ago today they are below 0.8% .

Should you defer arranging an annuity?

Anybody thinking about arranging an annuity should consider waiting until rates improve so they can get more income for their money.

Unfortunately, it may not be as simple as this if you retiring now and want to convert your pension pot into a guaranteed income for life. First of all, rates may remain low for a long time and secondly there is an opportunity cost when deferring an annuity.

Annuity rates are very close to their lowest levels ever which was back in 2016 after the Brexit referendum. The benchmark annuity (£100,000 joint life annuity for a couple aged 65 and with 2/3rds partners pension and level income) was paying over £6,750 per annum gross before the credit crunch in 2008. This fell to below £ 4,000 in 2016 before rising to nearly £4,700 at the beginning of 2019. Today the benchmark annuity has fallen back to below £4,000. If rates bounce back to the level seen at the beginning of the year it will be worth holding out for another £ 700 every year but don’t hold your breathe as rates rise slowly.

Double whammy

Those who are serious about maximising their annuity income also need to keep an eye on the stock market because there is potential for a ‘double whammy’. That is falling pension fund values as well as falling annuity rates. The amount of annuity income is a product of both the pension fund value and annuity rates. In normal times these can even themselves out because falling annuity rates maybe cushioned by an increase in the value of the pension fund but these are not normal times.

Although annuity rates are once again at rock bottom there is still a strong case for considering annuities when guaranteed income for life is needed.

See the annuity charts

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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