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Annuity Update May 2018
As I review annuity rates at the beginning of May 2018 I am struggling to say anything new because there has been little meaningful change to rates over the last few months except for relatively small changes to some rates when yields have changed.
Little has changed
Annuity rates have been stuck in a narrow band for the last 8 months with the benchmark annuity rate (£100,000 for joint life 2/3rds, ages 65 and 60 with level payments) paying between £ 4,400 and £ 4,650 per annum gross. This means the maximum change over the last 8 months has been around 5.5% or an extra £ 250 per annum for every £100,000 invested. As a well-known supermarket says ‘every little helps’ but such a modest increase hardly signals a change in fortunes for annuities.
There should be no surprise at the relative stability in the annuity market because, the benchmark 15-year gilt yield has only moved slightly within the narrow range 1.6% to 1.9%. I have previously said that yields will need to go higher than 2% before meaningful increase happen but there are no signs that yields will move higher at the moment.
My predictions were wrong
At the beginning of the year I was optimistic that yields would rise resulting in increased annuity rates and therefore annuities would become popular. I also predicted that drawdown would become less attractive, especially for those with smaller funds, if there was a fall in equity prices.
It seems I was wrong on both counts as annuities have stayed in the doldrums and despite the fall in equity prices towards the end of January, there is no sign that advisers or their clients have less of an appetite for drawdown, despite the market correction earlier this year.
Annuity update 12th April 2018
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.
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.
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.
Annuity Update February 21st, 2018
Annuities are coming out of the doldrums as rates rise are rising on the back of increased bond yields.
Since the beginning of the year the yield on the benchmark gilt has risen from 1.67% to 1.91% (3rd week in February). This may not seem a big increase but is enough for annuity providers to increase their rates.
At the beginning of the year, our benchmark annuity (£100,000, joint life 2/3rds level annuity for a couple aged 65 and 60) was £ 4,447 gross and this has increased by £ 145 per annum to £ 4,592, an increase of 3.3%.
Annuities still have a long way to go before they get back to levels seen in 2010 when the benchmark annuity was paying over £ 6,000 per annum and the benchmark yield was about 4%. If the benchmark gilt was to increase by 50 basis points to about 2.5% in 2018 we could expect annuity rates to increase by another 5% which would take the benchmark annuity to over £ 4,800.
Yields are increasing as a result of markets reacting to the prospects that the Bank of England will increase intertest rates faster than previously thought on the back of renewed concerns about increased inflation.
In practical terms, anyone thinking of delaying an annuity in anticipation of increased rates should be mindful that any gains in annuity rates could be set against the income lost by waiting. It also important to review investments in the run up to retirement because a fall in equity markets could mean a smaller pension pot to buy a higher annuity.
If you want to make the most of pension freedoms you should start planning ahead and make sure your financial affairs are in good shape in the years running up to retirement.William Burrows
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