Rates for pension annuities have held firm this month, according to the Alexander Forbes Annuity Bureau. The news comes just days before the long awaited emergency budget, in which there is expected to be wide reaching cuts in public spending, including cuts in public section pension contributions. With the exception of Aviva and Aegon, most providers held their rates for June. Whilst 2010 overall has seen rates falling by around 5%, June seems to be an aberration of the general trend. Financial expert Tim Whiting says that… ”…the Annuity market seems to have taken a breather in June.”
Many argue that the financial markets will react once the measures in the budget have been announced. If the markets react well, some annuity rates could increase as providers will be more optimistic it is argued. Existing annuitants with investment-linked annuities could potentially see higher payments. However if the reverse happens – the markets do not like the measures, bond and gilt prices could increase as those investors and fund managers would have previously gone into more riskier stock markets opt for safer investments. This could then increase the bond prices and thus reduce the yield for insurers, thus putting downward pressure on rates. A third scenario could be that the measures are not seen as strong enough by global investors who will become less likely to purchase UK government bonds. This will put downward pressure on bond prices, thus increasing the yield and pushing upward pressure on rates.
However, whatever comes out in the budget, it appears rates will continue on a downward trend. Mr Whiting notes that…”…overall demographic pressures mean the long term trend for annuities will inevitably continue to be downwards and people must make strenuous efforts to build up the largest possible pension pot before reaching retirement age.”
