Low Annuity Rates

Beat All Time Low Annuity Rates

For people that are soon to retire, this year is possibly the worst year on record for converting your pension fund into an annuity income.

What is an Annuity?

An annuity is where you give a lump sum of money, usually your pension fund, to an insurance company and they pay you an income, your annuity, for the rest of your life.  The rate of income you receive is linked to what annuity rates are, i.e.  the interest rate, that you secure on the day you take your pension.

Why are Annuity Rates so Low?

When you give your money to the annuity company, they are then committed to paying you an income for the rest of your life and in many cases, continuing payments to your spouse after your have died.  This is a huge risk to the annuity company.  To protect themselves, annuity insurers usually then use your money and lend it to the Government to buy a guaranteed income to protect themselves.  British Government Sovereign Debt Securities are known as Gilts.  ‘Gilt edged securities’ are so called because the British Government backs them.  Currently, gilt yields are at an all time low, meaning that interest rates on gilts are low, directly affecting the annuity rate for your pension fund.  

Why are Gilt Yields Low?

As we all know, investors are avoiding lending to European Governments and looking for security by lending money to perceived safer bets such as the US and the UK.  In short, due to demand, it is much cheaper for the British Government to borrow money than it is the Spanish or Greek governments.  The British Government is therefore able to offer very low interest rates on gilt debt when borrowing.  

In addition, to stimulate the economy, the Bank of England is doing something called ‘quantitative easing’ (QE).  QE is where the Bank of England buys back gilts, i.e.  it prints money and buys back its debt, mainly from the leading banks.  Thus releasing more liquid cash to banks to stimulate the economy by them having more money to lend to business or on mortgages.  The key here is that it is buying back debt, i.e.  reducing the amount of gilts on the market.  If there are less gilts around to buy and more investors that want to buy them, demand is up and supply is down i.e.  the purchase price goes up but returns go down.  Yields are therefore at an all time low meaning that our pension annuities are at an all time low.

Getting a Bigger Annuity - Shop Around

You have a right to shop around called an open market option.  There is competition for your pension money and your current pension provider may not be offering you the highest annuity rate.  

Enhanced/Ill Health Annuity

If you have health conditions such as heart problems or diabetes linked to cholesterol or high blood pressure, if you smoke or if you live in a postcode that is deemed a deprived area, your life expectancy may not be as high as others.  Therefore, you may qualify for an enhanced annuity.  Enhanced rates can be higher by as much as a third or even half again because, and sorry to be blunt here, the annuity company does not expect you to live as long as a healthy person, so they give you more.

Investment Linked Annuity

For some, taking risk to improve income is worth it.  Investment linked annuities have some degree of risk.  You are allowed to set your income level within limits, usually linked to the standard annuity rate.  If markets grow, you will be given the option to increase your income.  If markets fall, your income may fall, but usually only to a set lower level (a collar).

Postpone.  Wait for Annuity Rates to go up

There are currently record levels of pensioners deciding to work on.  Not just because of the recent Equality Act on removing a default retirement age but also those waiting for annuity rates to improve or to get further growth on their pension funds.  

Drawdown Income from the Pension Fund

A higher risk option is drawing down an income from your pension fund, known as capped drawdown.  This is where you are allowed to release some or all of your tax free lump sum today and the balance of your pension fund remains invested, i.e.  you do not buy a low rate annuity today.  You are then allowed to draw an income directly from your pension fund as and when you need it.  This can be monthly, quarterly, annually or as one off payments.  You can choose an income level between zero and up to 125% of the current standard annuity rate, as published by the Government.  Much in the same way as postponing retirement, you are gambling on waiting for annuity rates to improve in the future, or for some they use drawdown as a tax and estate planning vehicle, never buy an annuity and run down all of their pension money to zero, before they start spending other capital.

Once in a Lifetime Decision - No Going Back

Retiring is one of the biggest decisions we make.  It will affect the rest of your life.  With annuities, once the decision is made, there is no going back, so it pays to be serious about retirement and take professional financial advice before making that final decision on how to beat low annuity rates.

For more on annuity rates visit annuity rates advice.com or speak to us today.

.