Annuity rates continue to shrink
Falling government bond yields and increasing lifespans are pushing down annuity rates.
Annuity rates are currently at the centre of a perfect storm:
Yields on long term government bonds are at historically low levels.
Life expectancy continues to increase rapidly, witness the government’s efforts to increase the State Pension Age faster than previously planned.
Forthcoming new EU rules are making it more expensive for insurance companies to underwrite annuities.
The overall result is that today’s annuity rates are low and may not increase again soon – at least not by very much. This means that if you are about to draw benefits from a pension plan, you must review all your retirement income options, including:
Open Market Annuities
You should never accept the annuity rate from your pension plan company without first checking what is on offer elsewhere. Annuity rate setting has become increasingly refined in recent years. For example, some companies now set rates according to your home postcode. If you are a smoker or in less than perfect health, you may be entitled to an enhanced annuity rate.
Phased retirement
Phased retirement involves drawing on your pension plan in stages, with each year’s ‘income’ consisting of a tax free lump sum and annuity payment(s). This route has the advantage of avoiding the one-off annuity purchase, but it does involve more investment risk. Part of your pension plan will remain invested after your retirement income begins and annuity rates could fall further.
Income drawdown
Income drawdown – drawing your income directly from your pension fund – is normally only a viable option if you have other sources of retirement income. It can offer considerable flexibility, but in most instances your maximum permitted withdrawal will be much the same as an annuity can provide. Income withdrawal arrangements virtually always carry investment risk and if this concerns you, an annuity could be a better option.