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Fresh record low for annuity rates strengthens case to delay purchasing

April 29, 2020
in Pension Policy
Fresh record low for annuity rates strengthens case to delay purchasing
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Annuity rates have tumbled to a new record low following the heavy market sell-off in the first quarter of the year.

Figures from Moneyfacts show the average annual standard annuity income for an individual aged 65 (based on a single life £10,000 level without guarantee annuity) fell by 6% in the first quarter. The falls meant the average annuity income fell to a fresh record low, 1.7% below its previous record low in October 2019.

The slump in government bond yields is a consequence of the benchmark 10-year UK government bond yield falling from 0.83% at the start of 2020 to 0.36% by the end of March. Most providers buy this type of bond to provide the fixed income they pay to policyholders. As a consequence, rates for those purchasing an annuity are negatively affected when government bond yields decline.

Government bonds are considered a safe haven by investors, which is why during the steep market sell-off bond prices rose and yields, which were already at historically low levels, declined further.

Zoe Bailey, chartered financial planner at Tilney, says those considering buying an annuity should keep their power dry. She says: “If you are able to, delay purchasing an annuity where you do not have a guaranteed annuity rate built in, as the value of the income will be based on the value of your pension pot at the date of purchase.

“You should also review the option to have a phased annuity, which you can take over time rather than locking in a rate today. This will help when markets pick back up, as we expect them to once the pandemic has receded.”

The data from Moneyfacts also shows that over the first quarter pension funds had their worst quarter on record, with the average fund declining -15.2%.  

Richard Eagling, head of pensions at Moneyfacts, says: “Whether it is individuals saving into a pension scheme or currently in drawdown, or retirees looking for the security of an annuity, the coronavirus pandemic has had a devastating impact on potential retirement outcomes. The hope is that these will prove to be short-term shocks, but for those planning for retirement now and looking for a retirement income immediately, they present unenviable challenges.

“UK pension policy has increasingly moved towards placing more onus on individuals to take personal ownership of their retirement finances in recent years and take on the risks associated with this, but unfortunately recent events have shown how vulnerable they can be to major world events.”

How falling gilt yields have hit annuities

Annuity rates have been in decline over the past couple of decades, due to the fact that people are living longer. As a result, insurers have become less generous – but the decline intensified during the financial crisis, which pushed both gilt yields and interest rates down to record low levels.

Before the global financial crisis struck, the 10-year UK government bond yield was above 5%.

When annuity rates peaked in 1990, a healthy 65-year-old man with £100,000 received £15,000 a year; today he will pocket less than £5,000.

 

— to www.moneyobserver.com

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