personal finance

Blow for pensioners as bond market rally hits annuities

What does this chart show?
The chart paints a gloomy picture for anyone looking to turn their pension pot into a secure retirement income, known as an annuity.

Since the beginning of the year, annuity rates — what is offered by insurers to turn a pot of pension cash into a secure retirement income — have fallen by 15 per cent. This means pensioners are getting a lot less from their savings.

In practical terms, a £100,000 pension pot now buys a 65-year-old a yearly income of £4,654 or £759 less than at the start of the year, according to Hargreaves Lansdown, the investment manager.

Why are annuity rates falling?
Insurers use a number of factors to set annuity rates, including life expectancy projections and movement in the yield on long-term bonds. Fears of a no-deal Brexit and a slowdown in the global economy have boosted demand for bonds, which in turn has driven down the yield on these assets and annuity rates. The yield on 15-year gilts was over 1.6 per cent a year ago, yet today they are below 0.8 per cent.

Will annuity rates improve?
Nathan Long, a senior analyst at Hargreaves Lansdown, says annuity rates could improve if there was a Brexit-inspired downgrade of UK government debt, although the last time such a downgrade was applied, gilt yields did not change significantly. Mr Long adds that if the Bank of England cut interest rates, gilt yields would likely come under further pressure, and therefore on annuity rates as a result.

How else might this affect my finances?
As gilt yields fall, savers are finding it even harder to generate a return on large cash balances. This week, the government-backed savings bank National Savings & Investments pulled its popular retail savings bonds from the market, saying the rally in the debt markets made it impossible to keep offering them to the public.

On the other hand, market movements have boosted transfer values for those thinking of cashing in a final salary-style pension.

The average transfer value for a 55-year-old who had been expecting a £10,000 a year pension jumped to £258,000 in August, up from £247,000 a year ago, according to XPS Pension Group.

How can I make the most of my pension pot?
Now is unlikely to be a good time to buy an annuity and lock into a rate for life. It may be worth waiting until rates recover, as they have done in the past.

Mr Long said using tranches of your pension to buy annuities as you get older helps spread the risk of buying when annuity rates are low.

“You can benefit as annuities generally pay more as you get older and any health conditions that develop can be factored in, which can also boost the payouts,” said Mr Long.

“Those who are serious about maximising their annuity income also need to keep an eye on the stock market because there is potential for a ‘double whammy’ — that is, falling pension fund values as well as falling annuity rates,” said Billy Burrows, retirement director with Better Retirement. “The amount of annuity income is a product of both the pension fund value and annuity rates.

“In normal times these can even themselves out because falling annuity rates may be cushioned by an increase in the value of the pension fund. But these are not normal times.”


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