Annuity rates have been falling steadily over a prolonged period hitting the incomes of those who are about the retire. Tom McPhail, annuity expert from Hargreaves Lansdown described the current situation as ‘meltdown’ highlighting the fact that a 65 year old male would today only get £5743 from a £100,000 pension pot whereas the same fund would have converted into £7855 just four years ago. Rates have been hit by a number of factors including the fact that the Bank of England base rate has been held at 0.5% since the Spring of 2009 in order to keep mortgage and borrowing costs down. The Bank and indeed the government know that an increase in mortgage payments for UK households is something that would do the greatest damage to the recovery. This has lead to a staunch commitment to keep the rate as low as possible. Whilst this maybe good news for borrowers it is very bad news for savers and pensioners as it has help to drive down annuity rates whilst also hitting the returns that can be made on savings. The Bank has also been in the firing line over it’s policy of Quantitative Easing or money printing as it is colloquially know. This has helped push up the price of government bonds which in turn as lessened the yields, which consequently has heaped further downward pressure on rates.
Whilst incomes have been cut, at the same time the cost of living has risen. According to the insurer LV=, living costs for pensioners have risen by a third since 2000. To cap all this life expectancy is also increasing meaning that retirement incomes are having to stretch for an increasingly longer period. Given this predicament, some are now questioning whether buying a lifetime annuity can deliver the kind of lifestyle many over 50′s will have envisaged for their retirement. If the average retirement span is more than 20 years, then a standard level annuity paying the same amount each year is going to be worth substantially less in real terms at the end compared with the beginning. How much less? Well a recent study from MGM Advantage shows that something which costs £100 in 1991 would now cost £176 in 2011, which means effectively someone who purchased a level annuity in 1991 has seen their spending power reduced by three quarters. All this makes it imperative that retirees get the best annuity on the market when approaching retirement, something that it is not happening despite the current economic circumstances. Below are some of the issues that need to be addressed…
When to retire
Traditionally most of us may have planned to retire on or before the State retirement age. However many over 50′s are now having to reconsider their retirement date. The latest research suggests that over 6 million over 50′s are now likely to work past the State retirement age with over half blaming the delay in retirement on their financial situation. The average number of extra years pent in work was cited as six although 20% said they planned to work for an extra 10 years. A further 11% however said that they were delaying retirement in order to get a higher income once they are retired. Doing this does allow an individual to build up a bigger pension pot but can also make a difference to the annuity they are offered.
Picking the right annuity
This is more important than it has ever been because rates are so poor. If you do delay retirement by a substantial number of years then you could find your chances of being eligible for a higher paying enhanced annuity increase dramatically. Any illnesses, ailments or lifestyle choices that are likely to decrease your life expectancy may enable you to qualify for enhancements. There are around 1,500 individual conditions that can qualify an individual for a better rate and the average increment in income through enhancement is 20%. If you have a serious medical condition the increase could be as high as 40%.
If you are healthy of course then you won’t be able to enjoy an enhanced rate which still leaves the problem of inflation eating away at your spending power throughout your retirement. Those in this situation many want to consider other options such as escalating annuities including inflation linked annuities. This allows you to hedge your bets of a future rise in annuity incomes against the performance of the stock market, whilst also guaranteeing a minimum income for life. These are popular with those retirees concerned about future rises in inflation and/or those with a larger than average pension pot. If you can afford to take a lower starting income and are willing to bear some risk that you income may not rise if market performance is poor then this could be the most suitable option.
For some however they just may want to avoid buying a life annuity at all given that rates are so low. For people in this situation there is the option of taking a short term annuity, a product that has grown massively in the past few years. These allow the individual to start receiving an income from their fund for a set number of years without committing 100% of their fund in one go. Once the fixed term annuity period has come to an end the person has the choice to either buy another fixed term product, a life annuity or alternatively they can purchase another retirement product such as an unsecured pension. By delaying their annuity purchase for a number of years rates may have improved and/or their health could have altered to the extent they would then become eligible for an enhanced annuity.
With such a huge difference in the top and bottom annuities on the market coupled with the fact that rates are so poor generally, getting the right advice, shopping around and choosing the most suitable product is absolutely vital in order to get the maximum income once retired.