Annuities -one step up, one step back
One step forward, one step back
In my last annuity update at the end of February I was upbeat about the annuities and the opening sentence was “Annuities are coming out of the doldrums as rates rise are rising on the back of increased bond yields.”
Just over a month later the wind has been taken out of my sails as gilt and bond yields have fallen resulting in lower annuity rates.
It is not a big deal because my benchmark annuity (£100,000, joint life 2/3rds level annuity for a couple aged 65 and 60) is only £ 100 per annum lower for every £100,000 invested, compared to one month ago. A fall of just over 2%. The benchmark is still about 1.5% or £ 70 per annum up compared to the beginning of the year.
See latest week by week chart.
A slow climb for annuities
We cannot read too much into one month’s data and I don’t think this changes my longer-term view that annuity rates are at the start of a long slow upward climb. They probably will not get back to the levels seen before the credit crunch for a long time, but a rising annuity market will help annuities become more popular again.
Watch out for drawdown
However, the big story is not with annuities but with drawdown plans as equity markets remain uncertain and volatile. Whilst there nothing wrong with the fundamental economic and financial data, there is a lot of uncertainty about Brexit and President Trump’s actions in the US.
This may be turn out to be a temporary market correction but it shows that sequence of returns risk is not a theoretical risk but a real risk for those taking income from a drawdown plan.
Perhaps, it is sensible to consider the recent market volatility as a dry run for a possible serious market correction in the future and therefore start to batten down the hatches.
Are we at a turning point?
Many advisers and their clients (including me) have favoured drawdown over annuities when converting modest sized pension pots into income because annuity rates have been so low and equity returns were positive.
I am now of the opinion, that annuities are coming back into play for those with sub £100,000 pension pots and who have a relatively low risk profile. Not because rates are significantly higher but because the outlook for equities and drawdown is very uncertain.
What happens next?
Hopefully when I next report on annuities in a month’s time there will be good news for annuities and less bad news for equity markets.