Had we but time enough
When pensions freedoms were introduced in April 2015 the number of annuities being purchased fell dramatically. Flexibility and control were seen as by far the more attractive option, especially as annuity rates had dropped to such low levels.
Annuity rates are linked to long term Gilt yields. Over the past decade rates have fallen from over 5% to below 1% in the Spring of 2016. Rates have been driven to such low levels by an economic policy of low interest rates and Quantitative Easing. Whilst rates have “rallied” to c. 1.7% at the present time they are likely to remain close to their all-time lows for some time to come.
For a healthy 65 year old couple, £100,000 will currently buy a guaranteed level annual income of c. £5,000. That means it will take 20 years just to get their money back (ignoring tax!). That doesn’t seem a good deal – particularly as there is no access to capital and no way to change the terms of the annuity once it has been purchased.
What the annuity does provide, however, is an insurance policy against living longer than average. The income is risk-free and will continue to be paid even if the annuitant lives well beyond his or her telegram from the Queen. For there to be an average life expectancy of 85, some people must live well beyond that age. Be mindful of the ‘flaw of averages’.
Inflation-proofed annuities may also have a part to play in some people’s future planning. Starting rates of income are desperately low at just under £2,500 per £100,000 but future economic change could see this additional “insurance” element pay dividends. Who is to say that the high inflation rates of the 1980’s will never make a comeback?
In the short term, locking your money up in a low-yielding, fixed-income product such as an annuity is unlikely to make sense. But stay alert. Markets, interest rates and inflation will all change over time. The price of pension freedoms may be very low at present but that may not always be the case.
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