Looking for some good news? Here’s a tiny bit. The rise in gilt yields over the last few months might have made many of us think that the great bond bull market of the last 20 years has finally come to an end. But it also raises the prospect that annuity rates might finally rise. Annuity rates reflect the yield on 15-year government bonds (or gilts). That, along with the fact that the yield hit a low of 2.06% last year, has been a disaster for anyone in a hurry to nail down their income – as anyone who has retired since the financial crisis will know. Buy an annuity today and you’ll get 20%-30% less than you would have three years ago.
The rise in gilt yields – now more like 2.5% – hasn’t fed through to annuities yet, but it soon should. We would also expect yields to keep rising from here. That suggests that, however unsettling it might be if you are recently retired, you are probably better off waiting for a few months before you dive into the market. And when you do start looking to buy (assuming you do – it isn’t compulsory anymore), there are things you can do to make sure your payment is as good as possible. We have mentioned these here many times before. But given how important they are (your retirement depends on you getting this right), I’m going to say it again.
First, use your open market option (OMO). You do not have to buy an annuity from your pension provider. Rates vary wildly. So search the market (with or without an adviser) and get what you are due. Second, don’t forget your spouse. The vast majority of men buying annuities buy single income streams that die with them – leaving their spouse in the lurch. It isn’t kind.
Third, check and double check if you might be entitled to an enhanced annuity. These are available to anyone who might have a lower-than-average lifespan (if you are a smoker or an alcoholic, now’s the time to come clean) and gives them higher monthly payments in recognition of the fact that they won’t get as many of them as most people. Making sure you get one if you can is getting particularly important due to what The Daily Telegraph refers to as a “subtle factor” working behind the scenes. The more people who get enhanced annuities, the longer the average life span of those getting ordinary annuities will end up being.
As that longer lifespan enters insurers’ models, so ordinary annuity rates will fall (after rates, longevity is the major factor in the calculation of annuity rates). There isn’t much you can do about this if you are in perfect health. But if you aren’t, then do make sure that you apply for a deal that pays you for being unwell, rather than penalises you for other people’s problems.