Since the introduction of pensions flexibility in 2015, annuities have become significantly less prevalent as a way of converting a pension fund into income. “Indeed,” commented Adrian Moy, Independent Financial Adviser and retirement specialist at Pembroke Financial Services, who offer pension and retirement Income planning services to clients across Sussex and the wider South east “the most recent figures from the Financial Conduct Authority show that over five times as much money is placed in income drawdown now as goes towards annuity purchase.”
Now annuity rates are back in the news, with several press reports citing calculations from the Moneyfacts comparison website showing that rates had hit their lowest level in 25 years.
According to the data, a 65-year-old purchasing an ordinary pension annuity, with no increases in payment and no minimum payment period, could expect to receive just 4.1% – £410 a year per £10,000 of investment. That was a significant drop from the start of 2019, when an extra £58 a year was on offer.
In the immediate term the cause of the annuity rate decline has been the drop in long-term interest rates since January 2019. An example here is the yield on a 15-year UK government bond (a Gilt or Treasury) fell from 1.56% at the start of the year to 0.86% by mid-September. Adrian confirmed that “This fall in long-term rates has been a global phenomenon, resulting in negative interest rates spreading to many international bond markets.”
Over the longer-term the fall in annuity rates reflects declining interest rates, which have been on a multi-decade downward path. In addition, increased life expectancy has put downward pressure on annuity rates, although this effect has receded latterly as recent statistics have suggested life expectancy improvements are flatlining.
The preference for Flexi Access Drawdown as it is known ‘in the business’ does come with both investment and mortality risks – investment returns could be below expectations and/or you may outlive your pension pot.
Adrian concludes “If nothing else, the annuity rate can provide a benchmark against which to consider the rate of income withdrawals. If you are approaching retirement, make sure you take advice before dismissing annuities completely, especially if you are risk averse or will have few other sources of retirement income.”
If you are some way from retirement, remember that 4.1% figure when you think about how much you want to contribute to your pension. After all, at 4.1% a £25,000 pension annuity – with no inflation protection or spouse’s benefits – will cost about £610,000… so, if your pension planning does not reflect this, the sooner you review it, the better.
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The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances.