Annuity rates are the highest they have been for the last five years, thanks to the current credit crunch crisis affecting the mortgage market. The affect of the credit crunch is that there is less confidence in government and stock markets. As a result, the income from company loans, i.e. corporate bonds has increased and this is the money that insurance companies use to pay annuities.
When people retire, most purchase an annuity to guarantee them an annual income for life. As corporate bond income has increased, so have the rates that are offered to annuitants.
As an example, a 65 year old man can get around a 7.66% annual return on his pension funds at the moment. Compare that with two years ago and that’s an increase of almost 11 percent. For a 65 year old woman, she can currently get around 7.18%.
With an aging population and around 460,000 annuities purchased last year, this will affect a lot of people and the price battle currently going on means the annuity market is quite competitive at the moment if you shop around. In th past, rates have been quite stagnant but so far this year there has been around 40 annuity rate changes, 17 in the last month and the majority of them have been changing for the better.
What you must remember is that whatever annuity rate you can purchase today stays the same for the remainder of your life – no matter how long that is – so now is a good time to retire. With average life expectancies of about 86 for males and 88 for woman that is pretty good. An annuity is the only investment that guarantees to pay for the rest of your life.
However, the current situation is quite unique so it is impossible to say how long it could last. Insurance companies are able to buy their corporate bonds at the lowest levels ever and the financial markets are low, so the income from corporate bonds is high. As bond prices increase again, annuity rates will lower again.
If inflation rises, that would push rates up, but insurers are constantly having to rethink their rates as people continue to live longer, pushing up the average life expectancy. As buying an annuity is a one-off decision and one of the most important you will make, it is important that people shop around to get the best annuity rate they can. If you are close to retirement, my personal opinion would be that now certainly looks a good time to buy your annuity.