Hargreaves Lansdown has urged consumers to use a mix of products when approaching retirement to avoid overexposure to volatile annuity rates.
Analysis published by the firm today (September 4) found annuity rates have fallen 14 per cent since the start of the year.
This means a £100,000 pension currently buys a 65-year-old a £4,654 annuity which is £759 less than at the start of the year, based on the best offer available.
The plunge in rates is primarily due to a decline in gilt yields, which have fallen as a result of Brexit uncertainty and because investors fear a slowdown in global growth.
Gilts are the secure investments that insurers use to underpin annuity payouts.
According to Hargreaves rates have only ever spent nine weeks at a lower level than they are at currently.
Hargreaves also said there have been 46 annuity rate changes already this year with rates falling for all ages although this was more pronounced among younger retirees.
Nathan Long, senior analyst at Hargreaves Lansdown, said: “Nobody knows what the final shape of Brexit will look like, or indeed how relations between China and America will progress, so the next step for annuity rates is hard to pinpoint.
“Annuity rates could improve if there was a Brexit inspired downgrade of UK government debt, although it’s worth pointing out that last time a downgrade was applied gilt yields did not change significantly.”
The income available from a £100,000 pension:
Age | 60 | 65 | 70 | 75 |
Income at the start of the year | £4,776 | £5,413 | £6,099 | £7,055 |
Income now | £4,051 | £4,654 | £5,443 | £6,419 |
Change | -£725 | -£759 | -£656 | -£636 |
-15% | -14% | -11% | -9% |
Source: HL Annuity Index; single life, non-increasing annuity, guaranteed for 5 years and paid monthly
To avoid the risk of low annuity rates, Hargreaves Lansdown urged savers to consider a combination of products rather than putting all of their money into an annuity.
One option would be to buy an annuity later in retirement and to invest the remainder in an income drawdown plan.
Another option would be to invest the pension fund and then take only the income produced from this investment when entering drawdown.
Adrian Boulding, chief innovation officer at Spire Platform Solutions, said: “Although annuity rates are historically low at present, they may still be attractive because low inflation means that the payments in later retirement will still buy quite a lot of the essentials like food and council tax.
“I suggest that advisers consider a ‘bit of both’ strategy and maybe recommend clients to split their retirement fund and buy some annuity and invest the remainder in an income drawdown plan.”
But Mike Lacey, partner at Berkshire-based financial advice firm Bowman Pension Consulting, suggested individuals should put off buying an annuity for as long as possible until rates begin to make a comeback.
Mr Lacey said: “I feel that, unless there is a driving, overriding need to annuitise, our clients should defer purchasing an annuity for as long as they can.
“This is for three reasons: first, I expect that interest rates will rise in the medium term – and therefore so will annuity rates. This means more money paid out each month.
“Second; as an annuity purchased in a few years' time will be paid out for a shorter period than one purchased now, the annuity payable will be higher, but account needs to be taken of expenditure between now and the future annuity purchase.
“Third; with increasing age comes an increased likelihood of conditions that may qualify for an impaired life annuity – which will, again, be higher.
“I think the market for temporary annuities is underdeveloped; this could be an acceptable product for people who want to combine certainty for a few years, with longer term investment flexibility.”
amy.austin@ft.com
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