Should I Hold off Buying an Annuity in Case Rates Improve
Annuities are bought by those retiring in exchange for providing an income. Having considered the ‘expert’ opinion I think the question most people would like an answer to is “should I hold off buying an annuity in case rates improve”?
Annuity rates fall and rise in line with bond and gilt yields. It is predicted that as economic normality returns investors may no longer need a ‘safe haven’ and investors will sell bonds in exchange for shares. As bond prices fall, the yield would increase, which leads to better annuity rates.
I would suggest that there is plenty that could go wrong with such a strategy and it wouldn’t be wise to base your decision on your retirement income on the prospect that bond and gilt yields could improve. In addition, gilt rates are not the only factor effecting annuity rates. The other key driver is life expectancy, which has been rising. This could offset any improvement in better gilt yields. Not to mention that for every year you delay is another year of income you haven’t received. Finally, whilst you delay an annuity purchase you experience the investment risk of your pension funds.
The outlook for 2013
During the first few week of 2013 insurance companies have started to increase annuity rates to take account of the increase in yields and all the major annuity companies have posted at least one increase since the beginning of the year.
There is a simple rule of thumb. For every 100 basis points in bond yields – e.g. from 2.5% to 3.5% we would expect annuity rates to increase by about 8%.
However don’t hold your breath waiting for such a rise as it may be a long way off because insurance companies are generally quick to cut rates when yields are falling but slow to put rates up when yields are rising. They may choose not to pass on the improvements in yield if they want to improve their reserves or just wait to see higher rates firmly established.
It is too early to tell for sure but the signs are that 2013 / 2014 will be a better year for annuities as the yields on which annuities are priced are increasing. A recent article in the Telegraph suggested that rates could improve by 25% although when I have approached the pricing actuaries at various annuity providers none would make a prediction, stating that there are too many unknown variables to factor in. For example, planned EU legislation could reverse the expected improvements.
Before Christmas the yield on 15 year gilts was around 2.3 per cent but by the beginning of February 2013 it had risen to over 2.6 per cent.
Tim Gosden from Legal and General stated that if 15 years gilts doubled to 5% he would expect a 25% improvement in annuity rates. Predictions from some investment experts are for a 0.5% increase in bond yields each year, over the next 5 years, although there is clearly no certainty of this happening.
Then there is the EU legislation (Solvency 2) which will force insurers to increase their reserves. A report last year from Deloitte, the accountancy firm, suggested that annuity rates could fall 20% because of this.
Reality of gender neutral pricing
We are now one month into the new world of gender neutral annuity pricing and a quick look at the new rates suggests that many of the predictions may have been over stated by the potential effects of moving from annuities priced on gender to having the same rates for men and women.
We have not seen the pessimistic prediction of 10% falls for men as some predicted.
A benchmark annuity rate for men has seen a 3.5% cut while rates for female has increased slightly. The benchmark Joint life annuity rate has held firm.
New ABI Code takes effect for retirees
A code of practice has been drawn up by the Association of British Insurers (ABI) to ensure that everyone who approaches retirement age should have all of their pension options broken down and explained in detail to them by their provider.
The new codes comes in effect for March 2013 and means that all insurance companies must let their clients know that they can shop around for the best deals on annuities and other products.
Industry experts have long criticized the fact that a lot of pension providers do not advertise the fact that customers do not need to buy their annuity from them and do not advise them to shop around and buy it elsewhere.
In 2012, 55% of pension policy holders purchased annuities from the same company who looked after their pension.
In a bid to encourage people to shop around for the best annuity deals, insurers will no longer put application forms for annuities in the information packs they send out to people coming up to retirement age.
In addition, the ABI is also going to publish information about the different annuity rates that are currently available to help pensioners get the best deal for their money.
Other practices that have been included in the code are:
· Sending out information packs about retirement options two years prior to a person coming to state pension age, to help them to find the best retirement solutions for them.
· Following up this with details of how to combine smaller pension pots, six months prior to retirement and then again 6 weeks before a person is due to retire.
· Explaining to clients that ill health and lifestyle choices may mean a customer can get a better deal on their annuity.
With almost 400,000 annuities with an average value of £28,000 sold to pensioners in 2012, campaigners want to ensure people get the best information possible before they invest their money.
Director General of the ABI, Otto Thoresen, said: “The timely, clear and relevant information provided under the code will significantly increase the number of people reaching retirement with the confidence to make the right pension decision.”