Arguments against the use of increasingly parsimonious annuities for retirees will be given further weight by a further 0.25 per cent jump in the government actuary department rate, which is used to calculate income levels for those in income drawdown, according to LV=.
The rate, which is based on the return of a single life annuity and, ultimately, on UK gilt prices, is set to rise from 3 per cent in September to 3.25 per cent in October. This means that from October, the amount a 65-year income drawdown client can take from their fund will increase from £59 to £61 per £1,000, LV= said.
A 65-year old client with a £100,000 fund will be able to take £7,320 a year rather than £7,080 from their fund, the firm added.
Of course, increasing gilt yields and Gad rates would benefit both annuitants and those in income drawdown. But LV= stated that the increase emphasises the value of income drawdown in the wake of a growing tide of dissent over annuities rates.
David Ferguson, chief executive of Nucleus, wrote last week in FTAdviser that although annuities will remain an important part of the annuity mix they are not right for everyone. Mr Ferguson in particular stated that advisers should consider corporate bonds issued by life companies as an alternative for at-retirement clients.
The regulator is conducting a review into the annuities market to assess whether pricing is fair. The ABI last month launched its own ‘annuity window’, which provides details on conventional annuities rates offered by member providers.
LV= emphasised that the increase in Gad is “good news” for those clients approaching retirement as it means they can choose to take a higher level of income.
Ray Chinn, LV= head of pensions and investments (pictured), said: “With standard lifetime annuities offering poor returns, solutions such as income drawdown and fixed term annuities should be considered. Indeed in a low interest rate environment such as this, where pensioners who rely on their savings for additional income are hit hard financially, these alternatives become even more attractive.
“Unlike other major financial decisions, once someone chooses how to structure their retirement income, they can’t typically review their decision further down line so it is important that they purchase a product that ensures their needs are best met both now and in the future. Considering all the options available will help clients to maximise their income in retirement.”