It really doesn’t pay to delay buying that annuity. Annuity rates are set to stagnate, so now may be the right time to buy. If you are about to retire shortly, a bit of good news; annuity rates have nudged upwards just a little in the last fortnight. But if you are hoping for and holding out for a big rise in rates, you may be better off forgetting that and making a move now, because some specialists reckon we will see little change in rates over the coming months.
Pension annuity rates determine the retirement income you get from a pension fund built up via a money-purchase occupational arrangement or personal pension plan. They are very heavily influenced by interest rate movements, and, as the base rate has fallen, so have these rates. Last August they were at something of a six-year high, but have since dipped by about 10%. However, this downward trend has been bucked a bit of late, with a couple of tweaks and adjustments.
What is out there? First, we have the conventional “level” annuity which pays a fixed annual income, with no increase, to the retiree until they die. If you opt for a “single life” version, the income will cease on your death and your partner gets absolutely nothing. However, a “joint life” version pays, following your death, your partner, and they get a portion of the income you were receiving.
A 65-year-old man with a fund of £100,000 could buy an annuity giving an annual income of around £7,220 from the current best annuity quotes (single life level annuity), and this is a lot more than from an inflation-proof annuity, which, whilst offering some protection against the effects of ongoing inflation, actually pays out a lot less income initially. A married couple aged 65 will get an annual income of £4,040 for each £100,000 of pension savings if they choose RPI protection, and that’s about 38% less than the £6,580 they’d get by choosing a straightforward level income.
An “escalating” annuity is a bit cheaper. These increase your income by a fixed percentage each year, usually 3% – 5%. But they are still pretty expensive. For the same married couple with a £100,000 pension fund at 65, the annuity would start at just £4,668 with a 3% guarantee. The Financial Services Authority (FSA) estimates it would take around 14 years for a 3% escalating annuity plan to catch up with the income from a level version.
New “third way” annuities offer flexibility. You choose a guaranteed minimum income level from your pension fund, but you leave the money invested, giving the chance of an improvement in value. As an example, Aegon has just launched a Secure Lifetime Income annuity. It has a maximum guarantee of 4% at 65, and could work well with larger pension pots where you can split your choices.
And there are other options. Enhanced annuity rates are available If you have a medical condition that will reduce your lifespan (such as cancer, diabetes, high blood pressure, kidney failure, multiple sclerosis or stroke), or if you take prescribed medication or smoke, and these are well worth investigating.
