Our research shows that Annuity rates fell again last month as the effect of lower gilt yields continued to be felt by insurers.
In the first of two articles looking at falling retirement incomes we focus on Annuity rates.
How much have Annuity rates fallen?
Our benchmark Annuity, which assumes a male age 65, who wants a level income, with no guarantee and a 50% spouse’s pension, has fallen by a further 1.73% over the past month.
Over the past five months our benchmark Annuity has fallen by 10.23%, the equivalent to £635 per year assuming a fund of £100,000.
Interestingly for the first time in four months Aviva are not providing the best rate for our benchmark Annuity, the number one position has been taken by Canada Life; Aegon however have consistently provided the lowest income in each of the last five months.
When will Annuity rates rise again?
That really is the $64,000 dollar question.
While gilt yields continue to fall there is little hope that Annuity rates will rise, whilst we might see the occasional rise as Annuity providers jockey for market position, in our opinion the trend for the foreseeable future is definitely downward.
Further downward pressure on Annuity rates is also likely to come from Solvency II, which is forcing insurers to increase their cash reserves and also the removal of gender discrimination in pricing, which will see male and female Annuity rates equalised.
What are your options?
Annuity rates are clearly falling, and in our opinion show no sign of increasing in the short term at least. So what are your options?
If you want a guaranteed income for life then an Annuity is your only option. Following our ‘Five Golden Rules’ for buying an Annuity will help you to maximise your income:
- Confirm that an Annuity is in fact the right option for you
- Use your ‘Open Market Option’ and shop around for the best rate
- Check whether you qualify for an Enhanced Annuity
- Consider moving your fund to Cash to avoid market volatility
- Take independent advice
You can read more about the ‘Five Golden Rules’ in this article by Shaun Brennan, one of our Independent Financial Advisers.
An alternative, which also provides a guaranteed income, is a Fixed Term Annuity, also sometimes known as a Third Way Annuity. A Fixed Term Annuity provides a guaranteed level of income for a fixed period of time, generally three to 10 years, at which time a Guaranteed Maturity Amount is given and which is used to buy another Fixed Term Annuity, Lifetime Annuity or other suitable retirement income product.
The advantage of a Fixed Term Annuity is that you are not locking in to current Annuity rates for the rest of your life. The hope is that at the end of the fixed term Annuity rates will have risen, although there is clearly no guarantee of this. You will also be older which may increase the possibility that you will qualify for an Enhanced Annuity.
The traditional alternative to an Annuity is Income Drawdown, where the fund remains invested and income is drawn from it. The level of income available from Income Drawdown products have also suffered from falling gilt yields in recent months, our second article in this series explains more. However there are other reasons people use Income Drawdown plans, which can still make them attractive.
If you are retiring in the next few months your income is likely to be lower than it would have been even a few months ago, there are options though which may be able to offset some of the effects of lower Annuity rates.
If you are retiring soon and are nervous about Annuity rates or would simply like some advice on your options do not hesitate to contact one of your team of Independent Financial Advisers on 0115 933 84330115 933 8433 or by emailing email@example.com