Death by a 1,000 cuts, the continuing decline of annuities10 August 2016
Collapsing yields strengthen case for reversing Lifetime Allowance cuts, or scrapping the LTA altogether
Last week saw the Bank of England implement a further reduction to their base interest rate to a historic low of only 0.25%. In addition, the Bank of England Monetary Policy Committee (MPC) announced plans to purchase up to £10bn of Corporate Bonds and up to £60bn of UK Government Bonds. Gary Smith, Financial Planner at leading advice group Tilney, reviews the impact that the base rate cut will have on the retirement market.
Smith comments: “The negative impact that this interest rate reduction will have on those with cash savings has been widely reported on but it is important to also highlight the detrimental effect this will have on those who are approaching retirement and would still prefer the surety of purchasing an annuity to secure a guaranteed income. Indeed, given that annuity rates are directly related to Gilt Yields (UK Government Bonds), the recently announced measure of the MPC are likely to have a far greater impact on those seeking to buy an annuity than on savers.
“Annuity rates were already negatively being impacted by market jitters, including the uncertainty created by the vote for Brexit, as nervous investors have seen Gilts as a safe haven. As Gilt prices have rallied, this has in turn decimated Gilt yields, with 10-year Gilts now yielding 0.55% at a time when inflation is expected to rise. The effect on those about to purchase an annuity is devastating: I have already experienced a reduction of 5.4% in the annuity rate quoted for a client, and this reduction occurred in a short period between 6th July and 9th August 2016. The annuity quote was obtained for a 65 year old male who was seeking to purchase a joint life level annuity, including a 10-year guaranteed period and a 50% spouse’s pension.
“The outlook for annuities is bleak, as the Bank of England has signalled the potential for a further interest rate cut depending on the data. This will adversely affect those either at, or who are approaching retirement, and who want to avoid the investment risk and charges associated with keeping a pension portfolio invested in the markets through drawdown. Those affected could find that they will receive a much lower income than they were expecting or having to increase contributions ahead of retirement to offset the reduction in annuity rates, although this could prove quite a costly exercise and this may not be an option because of the unhelpful recent reduction in the lifetime allowance, a decision which the reconstituted Government really should reappraise. Indeed a £1 million purchase of a joint life annuity for a 65 year old, increasing by RPI will currently provide a £25,120 annual income or £18,843 if the saver takes their 25% tax free cash which is well below the average UK salary.
"Those who are impacted could opt to go into drawdown as a temporary measure and defer purchasing an annuity until rates hopefully improve in the future, although forecasting when interest rates might start to increase again is very difficult, even for economists, and has long been a moving target. Those who have health conditions should also consider applying for Enhanced/Impaired annuities, as this could see a potentially higher rate offered to them.
“Ultimately the attractiveness of annuities has gradually been reduced due to a combination of the introduction of pension freedoms legislation and a prolonged period of low interest rates and Gilt Yields. With little expectation of an increase in interest rates in the short term, the future for annuities seems very gloomy indeed.”
To discuss this or any other financial planning topic please contact Gary Smith on 0191 269 9971/ firstname.lastname@example.org
The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This press release does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Past performance is not a guide to future performance.
Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. Please note we do not provide tax advice.
Current or past yield figures provided should not be considered a reliable indicator of future performance. If you are unsure of your options you should seek professional financial advice or visit Pensionwise.gov.uk.
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