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The case for annuities is getting stronger

It is still not the year of the annuity!

In January I wrote a piece asking if 2018 was going to be the year of the annuity? For the Chinese, 2018 is the year of the dog but in the UK, annuities have been in the dog house since pension freedoms and they look like remaining in the kennel for sometime to come.

The case for annuities is getting stronger

There are few people more enthusiastic about annuities but since pension freedoms it has been difficult to argue the case for annuities because not only are rates at historically low levels, the flexibility provided by drawdown has got the upper hand. However, there are signs the case for annuities is becoming stronger as the volatility in the financial markets is taking the shine off drawdown and there is more research on the usefulness of annuities. For instance, a new report from Milliman shows how a combination of an annuity and a drawdown could result in a higher likelihood of achieving a client’s target income and having a higher death benefit.

Annuity trends

Before I look at this, a quick update on annuity rates. Today, my benchmark annuity rate pays £ 4,670 per annum gross (£100,000 joint life annuity for couple aged 65 and 60 paying 2/3rd spouse’s pension with level payments). Just before the EU referendum in June 2016 it paid £ 4,564 roughly the same but fell to £ 3,800 after the Brexit result. It took until January 2017 for rates to bounce back when they reached the £4,400 level. Since then, rates have slowly risen by a few hundred pounds a year to £ 4,670.

In simple terms, annuity rates have remained relatively flat for the last two years with an increase of only about £300 per annum or 3% since January 2017 or if we want to be more dramatic up £ 900 or 23% since the low point immediately after the Brexit referendum.

As for the future, I predict a slow but sure increase as long-term interest rates nudge up. But if rates only increased by £ 300 per annum for every £ 100,000 over the last two years we shouldn’t expect any dramatic upturn in annuity rates.

Technical and emotional factors

I spend my time in the real-world advising clients about how best to convert pension funds into cash and income and writing guides about retirement planning. In my experience every decision involves some technical analysis and an emotional element. Get the analysis right and the emotional part is easier.

As far as annuities are concerned, emotionally many people dislike the idea of letting go of their money for fear they might die leaving nothing to the family. I shoot this down by pointing out that most annuities are joint life of have a significant guarantee or value protection option.

On the technical side, annuities provide valuable insurance against outliving the available pension pot. This point was developed and expanded by a recent report form Milliman where they showed that if instead of holding bonds in a drawdown portfolio, annuities where purchased instead there was a higher probability of achieving a sustainable income. The report also made an interesting discovery. Using annuities in combination with drawdown may actually increase the death benefits. This should provide comfort for those who are worried that when they die they will lose the money in their annuity.

I have long argued that it makes sense to consider annuities as part of a risk-controlled solution because the underlying yield on annuities is higher than bonds, there is no default risk and annuitants benefit from mortality cross subsidy.

Do read the report Annuities the 'missing asset class' for sustainable retirement income ) as it as a valuable addition to the body of technical literature about annuities. Even better, follow my annuity trends

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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