A ‘perfect storm’ for annuities could lead to drawdown becoming the default retirement option, according to Alliance Trust Savings.
Annuity rates – which are based on 15-year gilt yields – fell following the UK’s decision to leave the EU as investors further piled into government debt as a safe asset class.
Gilt yields have declined considerably since the global financial crises and the Bank of England’s (BoE) subsequent entry into government debt markets via quantiative easing (QE).
The yield on 10-year gilts hit a record low this month, as investors digested a problematic start to the Bank of England’s latest QE programme. The 15-year gilt yield fell to an all-time low of 0.9 per cent on August 11.
Brian Davidson, senior pension proposition manager at Alliance Trust Savings, said: “At such low prices, annuities will be unattractive for many more people, with the disadvantage of very low levels of income far outweighing the benefit of income certainty.
“Rates fell further following the BoE’s Monetary Policy Committee‘s cut to the base rate of interest at the start of August and, with speculation around a further base rate cut later this year, annuity rate rises seem unlikely.
“A ‘perfect storm’ has been created with the danger being that annuities will simply become unpalatable, resulting in more individuals considering drawdown as the main means of providing a retirement income.”
Income drawdown allows retirees to take a portion of their pension fund as income while leaving the rest invested, allowing individuals greater flexibility and control. However, the product runs the risk of running out of money if retirees underestimate how long they will live and withdraw too much money too soon.
Recent data from the Association of British Insurers showed some savers are doing just that and exhausting savings too quickly, with figures showing payouts reached £8.2bn in the year since the freedoms were introduced.
Colin Rodger, director at Glasgow and Edinburgh-based Alexander Sloan Financial Planning, said Alliance Trust Savings had drawn an accurate summary of the situation.
He said: “Annuity rates will remain where they are or possibly get worse if interest rates are cut further, so drawdown is a more attractive option for most people. It does of course throw up other issues.
“It would be worth the Government consulting about decoupling annuities from Gilt yields and finding another underpin for them.”
ruth.gillbe@ft.com
