A fundamental misunderstanding of annuities?

 Source: Mike Morrison, Money Marketing

 

There has been a lot of noise in the press recently about annuities. The need for advice or not; the need to consider factors other than just the initial rate (spouse provision, death benefits and inflation proofing); the crossover point at which an annuitant will get back the full value of their pension fund. Age 82 has been quoted as the age at which full value will be returned and 90 to get good value.

It is difficult to believe that annuity rates were somewhere around 16 per cent in 1990, with the comparable rate today being something around 5 per cent.

At historic rates a degree of value was set but it has been a downhill journey ever since.

I am often asked if I have any feeling for the future of annuity rates. It is obviously difficult to say with certainty but the following factors do not look positive:

• Greater longevity
• The underwriting of annuities taking poor lives from the annuity pool
• More people with larger funds doing income drawdown and taking large funds from the annuity pool
• Gender discrimination rules
• Solvency requirements for annuity providers
• A continuing low-interest-rate economy, as recently announced by the Bank of England.

As I write, I note that gilt yields have risen to their highest level since 2011 and this could well be reflected in annuity rates but by very little.
 

Annuities have been around for a long time and for many years were the only way of converting pension funds into an income stream. When this was at 16 per cent this was not bad but at 5 per cent it does not look so good.

The article contains further information on average annual change in annuity income since 1998, the fall of average annuity rates, and projected increase in life expectancy at age 65.  To read the full article from Money Marketing, follow this link.