What will happen to annuity rates in 2012?

Wednesday, 08 February 2012 10:05

By Kate Saines

If 2012 is the year you are due to retire you’ll no doubt be eager to learn more about how annuities are set to fare this year.

Having spent years squirrelling away your hard earned cash into your pension pot, it goes without saying you will want the best possible annuity rate available.

So keeping your eye on the ball to ensure you are up to date with the rises and falls in the annuity market will certainly be helpful.

But, having a bit of insider information on what the experts expect in 2012 will also be valuable.

It’s important to remember, however, that while the markets and what is happening to the economy play a leading role in affecting annuity rates – we also have some control ourselves.

For starters, factors such as the state of our health and our age will influence the rate an annuity provider will offer us.

The size of our pension pot is also of major importance. And, of course the provider from whom we purchase our annuity will make an enormous difference to our income as rates vary from company to company.

Open market option

Taking advantage of the open market option – in other words not automatically using the annuity offered by your pension provider and shopping around for a better deal – will almost certainly help you access better rates.

Karen Barrett, chief executive at professional advice website, unbiased.co.uk, said: “Pension annuity rates are at all-time low levels with little prospect of speedy recovery.
“Individuals about to draw income from their pensions must consider all of the options available to them.

“Alternatives such as drawdown, phased retirement, temporary annuities, investment-backed annuities and the open market option must all be considered before the irrevocable decision to buy an annuity is taken.”

“A poor decision at retirement,” she explained, “can affect a lifetime of pension saving.”

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Falling annuity rates

So where are we with the annuity market? According to Billy Burrows, annuity expert at Better Retirement Group, annuity rates fell by eight per cent in 2011.

Unfortunately this looks set to continue in 2012 with factors such as quantitative easing – printing more banknotes – and gender discrimination rules coming into force expected to have a huge impact.

Mr Burrows said: “There are still significant downward pressures that are keeping annuity rates low. For example, by the end of 2012 insurance companies will have to change the way they price annuities as it will no longer be possible to price annuities based on gender.”

However, he said there were also “some forces” which might help gives rates and upward push – if gilt yields rose, for example.

He added: “These forces will probably not be strong enough to make any significant impact in the immediate future. At best we can expect rates to slowly nudge above present levels in the early months of 2012 providing there is no further bad news emerging from Europe.”

European gender discrimination legislation

Gender discrimination rules, as mentioned by Mr Burrows, do not come into force until December. However, experts predict the European Court of Justice ruling will see women’s rates nudge up slightly and men’s rates fall.

Quantitative easing, meanwhile, is already pushing down gilt yields and this is having a more immediate effect on our pensions.

In January the 15-year gilt yield fell to a record low of 2.25 per cent, an event which has had a dramatic effect on pensions, and for those drawing their income in February.

According to investment platform operator, Skandia, the 15-year gilt yield plays a crucial role in determining the level of income pensioners can receive.

The yield has been in decline since April 2011. And this decrease will, said Skandia, have an impact on those considering the use of income withdrawal or annuities to provide retirement income.

Adrian Walker, Skandia’s pension expert, said avoiding taking your maximum tax-free lump sum could be the solution to this problem.

“People need to be aware of the advantages keeping a small lump sum in their pension can have when they come to drawing an income from their pension,” he said.

“Holding a small amount back, and drip-feeding it – possibly on a regular basis – into drawdown could increase a person’s chances of raising their overall income level if stock markets or gilt yields improve.”

He pointed out, however, that not all pension contracts offer the flexibility to do this, and urged soon-to-be retirees to seek professional advice from a financial adviser.

Read more: How to protect your retirement income

Flexible products

You might also benefit from taking out a more flexible product to the standard annuity available. A fixed term annuity for example will provide you with a specified income for a set period of time – which can be from three to 25 years.

After the fixed period you’ll receive a guaranteed maturity payment which could be invested into another annuity.

Inflation will also have an effect on our pension pots in 2012, not to mention the cost of living. Although inflation has fallen recently figures released by retirement specialist MGM Advantage reveal the typical UK household needs to spend hundreds of pounds more today to maintain the same standard of living they enjoyed a year ago.

For households where the main occupant is aged between 65 and 74, £955 would need to be spent per year to keep up with standards of this time last year.

Aston Goodey of MGM Advantage, said: “We are seeing more interest in alternative retirement income solutions that can provide some protection against inflation and the rising cost of living.”

Among the products which provide this is the firm’s Flexible Income Annuity. Aston Goodey explained: “It offers the potential for investment growth, as more people recognise the need to mitigate against the impact of rising inflation and falling annuity rates.”

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