22 Aug 2011

How Annuity Rates are affected by the Global Economy

How Annuity Rates are affected by the Global Economy

Duncan Mellis, Financial Adviser, comments on the impact of the economic downturn and how it has affected retirement income for many private pension holders.

Duncan Mellis, Financial Adviser, comments on the impact of the economic downturn and how it has affected retirement income for many private pension holders.

In the last week insurers have sharply reduced annuity rates amid turmoil in the financial markets. 

The rates are dictated by the yields on UK government bonds, known as gilts, which have fallen as fears about the global economy have grown. Yields have an inverse relationship to prices, so they have dropped as many investors have rushed into bonds and pushed up prices. 

The yield on a 10-year gilt fell to 2.69% at the end of the week from 3.33% previously. 

Most insurers have responded by cutting the rates on annuities, which provide an income for life for people in retirement. 

Legal & General cut the value of annuities by 2%, reducing the annual income for a typical 65- year old man with a £100,000 pension pot to £5,500 down by about £400 from previously based on level payments and a two-thirds widow’s pension on death.

However the falls in annuity rates have not kept pace with the dramatic falls in gilt yields. As a rule of, a 0.5 percentage point drop in gilt yields should result in a fall of about 5% in annuity rates. Over the coming weeks it is expected that annuity rates will continue to fall until gilt yields strengthen again. 

For those looking to retire in the next 12 months should consider all options available from researching the market to obtain best annuity rates available to looking at income drawdown option and deferring off annuity purchase until markets stabilise. 

Typical annuity payouts have fallen 15% since 2008, when a £100,000 pension pot would have bought an annual income of £6,772 compared with £5,788 now.  

Currently the majority of people still take an annuity from their pension provider, but it is possible to secure additional annual income from another provider – known as exercising your open-market option. It may also be possible to qualify for additional income under an impaired life annuity. 

A further factor that will effect future annuity rates was that earlier this year, the European Court of Justice rules that insurers must bring the cost of premiums into line for men and women. Experts say that this will mean men losing up to £350 per year for every £100,000 they have in a pension pot. Women currently pay more for annuity income because they are expected to live longer. 

However by seeking independent financial planning advice all options can be explored in order to secure the best possible income in relation to your individual circumstances and aspirations.

Duncan Mellis, Financial Adviser


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