26th June 2013
With the 15 year gilt yield rising from 2.2% on 2 May to 3.0% (as of 26th June) Hargreaves Lansdown says that annuity rates should follow and become more generous but the firm has emphasised that it isn’t an exact correlation i.e. annuity rates usually track gilt rates over time but they don’t respond immediately.
Discussing the gilt yield picture, Hargreaves Landown head of pension research Tom McPhail says: “It is unrealistic to expect a sudden short term jump in Gilt yields to feed through immediately into higher annuity rates. However if this new pricing environment for gilts persists then an annuity rate increase is on the cards.
“It is important to bear in mind that annuity pricing does involve more than simply interest rates. Factors such changing life expectancy, regulatory controls, underwriting trends, insurers’ new business requirements all play a part in pricing decisions. It is also worth noting that there have been a number of annuity rate increases already in recent days (see table below). Annuity companies are moving their rates upwards, they’re just not in a hurry to do so.”
It may have a bearing on a retiree’s decision to delay annuitising, but there are a host of other factors to take into account.
“If you choose to delay you’ll have to keep your pension fund money invested somewhere and assuming it is a short term ‘treading water’ strategy that means holding it in cash, which in turn means losing money in real terms. This is not a ‘no loss’ option. You have to weigh up whether any short term loss of real value is going to be offset by higher rates and the longer you have to wait, the higher rates will have to go to compensate. This annuity delay calculator may help http://www.hl.co.uk/pensions/
“If you need income in the short term and just want to delay buying an annuity then the answer is to use drawdown but this involves more risk as you are drawing income from an investment fund; if the markets drop you could suffer a lot of damage to your retirement pot quite rapidly.”
McPhail also suggests mix and match may allow a phased approach.
“For many people a simple and sensible answer is to mix and match; buy some annuity with some of your pension fund today, and if more income is needed then either use the tax free lump sum or use the drawdown rules. If further income isn’t needed today, then it is fine to use just a portion of your pension fund to buy some annuity and leave the rest invested for now. This ‘phased’ approach minimises the risk of getting the timing wrong.”