A long way back for annuity rates

So, how do annuity rates look at the moment and what are their prospects, given that interest rates are currently so low and continuing to hover on the brink of negative territory?

Jonathan Cooper, head of paraplanning at Drewberry comments: “Annuity rates have been low for some years now − at least since the financial crisis of 2008/09.

Providers of standard annuities reduced annuity rates by an average of -1.19 per cent in December 2020 Nigel Hatt, Tilney Group

"The new record-low Bank of England base rate, held at its current rate in an attempt to head off the worst economic impacts from Brexit and COVID-19, has only compounded this. Ultimately, the wider economic picture will impact future movement in annuity rates.” 

A long road back for annuity rates

And positive change for annuity rates is not anticipated in the near future, as Carl Lamb, chartered financial planner and director at Smith & Pinching says: “Annuity rates are not brilliant at the moment and haven’t been for a while. In the short term, I don’t see any signs of improvement.” 

Ross Leckridge, associate director at Johnston Carmichael Wealth believes that there has been a number of factors keeping annuity rates low, as he explains: “The combination of low interest rates, low gilt yields and increasing life expectancy has been the perfect storm for annuities over the past 10 years or so. 

"If interest rates and gilt yields rise, you’d expect annuity rates to follow.  But given where we are right now, with economies taking a severe knock from coronavirus-related national lockdowns, that could take some time.”

Nigel Hatt, pensions specialist at Tilney Group also believes it could be a long road back for annuity rates, as he explains: “Providers of standard annuities reduced annuity rates by an average of -1.19 per cent in December 2020 and we would expect rates to fall a little further in the short term if gilt yields remain at current levels.

"Providers of enhanced annuities decreased their rates by an average of -2.15 per cent and in the wake of a record number of Covid-19 cases in January 2021 annuity rates reduced again.

“Having said this, it is not all bad news, as the vaccine programme currently being rolled out in the UK is on course and could end political uncertainty, thereby causing annuity rates to rise. It is however likely rates will continue at current levels in the medium term and rise when investors return to equity markets.

“In the long term, assuming the UK and global economies improve, with interest rates returning to higher levels, gilt yields can improve, and this would mean annuities increasing although the process could take many years.” 

Fiona Tait, technical director at Intelligent Pensions also anticipates a rise in the future: “We have been saying that annuity rates couldn’t fall any further for the last 20 years and been wrong for most of that time. 

“With long-term gilt yields now running at -0.5 per cent we would certainly hope that we are at the bottom of this cycle which means annuity purchase may become more attractive in future years.”

Rates are not the only consideration

However, low rates should not act as a deterrent and rates are not the only consideration, when considering annuities.

Jessica List, pension technical manager at Curtis Banks says: “While annuity rates are very low, for those who will need some level of guaranteed income that’s something to consider planning around, rather than a reason to avoid annuities altogether.

“While it would take a crystal ball to know what the rates will do in the future, those who may need an annuity will need to factor the possibility of low rates into their savings plans.” 

Tait takes a similar view: “I would caution against basing the decision on rates alone. If a guaranteed income stream will make the difference between paying essential bills and not, then clients should definitely be considering annuitising at least part of their fund.

"Further levels of annuitisation can then be built up over time as the client ages and is more likely to qualify for an enhanced rate.”

Leckridge also suggests looking beyond the rates: “The attractiveness of annuities is not so much the rate but more the fact that they are guaranteed to provide an income for the life of the purchaser.”

He adds: “If there is a requirement to provide for a guaranteed income then annuities are the most appropriate solution, irrespective of rate.

"The only time we would recommend otherwise, is if there is a positive outcome once we have run their information through our sustainability calculator and found that using drawdown will provide the required income for life, assuming a stringent stress test.”

Shopping around for the best deal on annuities  

In the meantime, annuity-seeking retirees and their advisers should make the best of the situation, by researching the market for the best deal available, as Alistair McQueen, head of savings and retirement at Aviva suggests: “With the economy in its current state of fragility and little expectation of headline annuity rates accelerating, this reality strengthens the need to shop around when considering annuity options.

“There are several annuity providers to choose from, and a greater number of annuity types from which to pick. By the adviser and client shopping around for their best deal, they will make their investment in an annuity drive its best possible return.

Fiona Nicolson is a freelance journalist