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Annuity rates are on the rise, but it won't last...
For a long time now, annuity rates have seemed on a permanent downward trajectory, to the point that every few months they are declared to be at record lows.
However, last week a funny thing happened, for the first time in absolutely ages. Annuity rates actually went up.
A rare rise
Indeed, six separate annuity providers improved the rates on offer with their annuities. They were Legal & General, Aviva, Aegon, Just Retirement, LV= and Canada Life - big names when it comes to retirement finance. And the rises were hardly small change, jumping by as much as 4% in some cases.
This led to retirement specialist Hargreaves Lansdown reporting that its Annuity Index had risen for the first time since June 2009 – rare good news in the annuity world!
Why it matters
When the time comes to retire, if you’ve been putting pennies aside every month, you should have a nice little pension pot built up. You can live off of that pot if you like, but you are required to convert it into an annuity by the age of 75.
An annuity is pretty simple really. It converts your pension pot into an annual income for the rest of your life. So as you come close to retirement, your provider will inspect your pot, and make you an offer, outlining what it will pay you each year until you die, should you choose to annuitize with them.
If you've left your pension planning to the eleventh hour, find out how to catch up quick.
If annuity rates have been falling for a long time, that means that the amount of cash pensioners are being offered to see them through retirement is also falling. So a rise in rates is a welcome boost for those nearing retirement, as there’s the prospect of a few extra pennies to look forward to!
But it may not last...
Sadly, such a boost is not expected to last long at all, with a collection of factors all pointing towards further pain for the annuity market.
As Hargreaves Lansdown themselves pointed out, inflation plays a big part. If fears of inflation are on the increase, then the yields on the bonds backing annuities also rise, which in turn can push the actual annuity rates up. If inflation fears recede, the opposite happens. In other words, if you’re nearing retirement age and about to start shopping for an annuity, it’s in your interest for inflation fears to go up!
With inflation currently at 3.2%, well over a percentage point above the Bank of England’s target, prospects for continued annuity rises appear pretty good in the short term. However, given the central bank expects inflation to fall back to 2% within 12 months, with individuals and businesses alike focusing our money on paying off debt rather than spending next year, there’s an argument that in the longer-term, rates will start to move south once again.
More bad news
It’s not just inflation either. Information about new rules regarding how much cash financial firms need to keep set aside to cover their risks – the snappily named Solvency II – is also due to be published shortly, which is expected to push rates further downwards.
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As if that wasn’t bad enough, there’s further bad news in prospect from our European chums, as next year the European Court of Justice will rule on whether providers will be allowed to offer different rates to men and women, as is the case currently. Should they rule in favour of unisex rates, you just know that rather than a significant increase in annuity rates for women, we’ll instead see rates on offer to men fall down to existing female levels.
The time to act is now!
All of that means that if you’re in the market for an annuity, it pays to get a move on! If you dilly and dally, you could end up seriously out of pocket at a time when money is pretty stretched anyway.
So how do you go about shopping for an annuity?
What type of annuity do you need?
Annuities come in different shapes and sizes, depending on things like whether you want the income level to be fixed, and whether you need a single or joint annuity (if you’re buying with your partner for example).
Recent question on this topic
- Bart53 asks:
So the first thing you need to work out is what type of annuity you need. Be sure to have a read of How to buy the right annuity for a great guide on how to work out which type you need.
The importance of shopping around
It should go without saying that you should not simply accept the offer your pension provider makes you – you’ll have no idea how competitive an offer it is (or more likely, isn’t) if you don’t do a little research yourself.