“It’s a bleak time for those approaching retirement,” says Nigel Callaghan of financial adviser Hargreaves Lansdown. “Savings rates have been battered and now annuity rates – the lifetime income you get paid in exchange for your pension fund – will plummet further.” So why do things look so grim? And can a potential annuity buyer do anything about it?
The blame starts with the Bank of England. Savings account returns have dived as the Bank has slashed its base rate. But it is quantitative easing (QE) that’s causing the real woe for prospective retirees. The Bank is snapping up UK government bonds – gilts – to try to push more money into the economy. Whether that will have the hoped-for effect of ‘reflating’ the economy, only time will tell. For now, the move has seen a sharp drop in long-term gilt yields, which directly determine the rates that pension providers offer on annuities.
Two weeks ago, before QE started, gilts with ten years to maturity were yielding around 3.6%. That has since plunged to just 3%. Major providers such as L&G, Norwich Union and Liverpool Victoria have already cut annuity rates. “In July 2008 a 65-year-old man in good health with a £50,000 pension fund could have bought a yearly income of £3,945 guaranteed for five years. Today, he’d get just £3,663,” says Jo Thornhill of Thisismoney. Pensions expert Dr Ros Altmann reckons a mix of lower annuity rates and stockmarket falls could cut the income of people buying annuities now by 35% for the rest of their lives.
In the short-term, things could get even worse. “For anyone planning to annuitise in the near future,” says Jarrod Parker at Alexander Forbes Annuity Bureau, “we see little benefit in delaying the decision, as the trend in annuity rates is only likely to be downwards.” But what if you wait, in the hope that QE eventually drives inflation and gilt yields higher?
Assuming you are under 75 (at which point most people have to buy an annuity by law), by staying in “income drawdown” – where you take a regular income from your pension pot – you could delay buying an annuity, and could also give any funds you have in the stockmarket a chance to recover.
Of course, you’re taking the risk that things could be even worse by the time you come to annuitise, and it’s really only an option for those with pension pots of £200,000 or more. If you must buy now, a future return to rising inflation could hammer your income – so, as Tom McPhail of Hargreaves Lansdown says, you should look at an inflation-linked annuity, even though these initially pay out about a third of the income of a conventional product. And in all cases, shop around – don’t, as more than 60% of people did in 2008, just accept your pension provider’s annuity without looking at the other options available.