There are currently 12.85 million pensioners in Britain, many of whom are being greatly affected by the Bank of England’s attempts to kick start the economy.  The record low level of interest rates, the historically low level of annuity rates and the increasing trend in inflation are all factors which have reduced incomes and eroded capital and reduced retirement incomes.

The Bank of England’s own figures estimate that low interest rates have cost savers £70 billion in interest since 2008. Now, the most recent government attempts at cost saving have seen the cutting of the winter fuel allowance and the introduction of the notorious “Granny Tax”, which in essence is the freezing or abolishment of the Age Related tax allowance.

One of the main methods that the Bank of England have attempted to revive the economy since 2008 is via Quantitative Easing.  This is where extra cash is pumped into the economy to encourage greater spending.  This has, to be fair, helped stimulate some growth, but at the same time, whenever people spend more, increasing demand, this in turn helps increase process and ultimately the rate of inflation.

The use of Quantitative Easing has resulted in the Government buying a number of Gilts, which in turn raises their price. A Gilt is essentially a loan made to the Government when it needs to raise capital. The increase in Gilt prices has reduced their yields and it is these yields that determine rates for annuities. When they are lower, annuity rates are lower so the income which pensioners can secure from their pension funds is lower.

The other way in which legislation has affected retirement income is the reduction in the maximum level that can be accessed under a normal pension drawdown contract. The Government recently reduced the maximum levels of income allowable in any year from 120% to 100% of Government Actuary’s Department (GAD) rates. This has affected an estimated 325,000 income drawdown pensioners.

The total impact of all these policies has been outlined in a recent study by the Centre for Economics and Business Research has predicted that the combination of the above Fiscal and Monetary measures will cost the average pensioner £451 per annum by 2013-14.

Please contact us for more advice on annuities.

With the continued decline of annuity rates is it reasonable to expect them to recover at some point or must we now accept that rates are low and will stay that way?  Well to answer this we firstly need to look at what has driven rates over recent years.

Longevity: It is a very pleasing fact that generally we can expect to have a longer life than that of our parents.  This is due in part to overall healthier lifestyles and in part due to advances in medical science.  Whilst this is a satisfying statistic, it does impact on the rate a provider of annuities is prepared to offer as they now expect to be paying these policies for longer than they ever have before. This is something that is not expected to change so there is no potential for rate increases here.

The Annuity Pool: All pensioners that bought an annuity had their money effectively pooled together, this meant in practice that a healthy individual’s money would be grouped together with people who were not so healthy and had a shorter life expectancy.  An annuitant would benefit from the money of those who died early and left their fund in the “Annuity Pool”. 

Specialist annuities are now available for those with shorter than average life expectancies, giving them a better rate to reflect. This is more than fair; however it has greatly reduced the effect of the annuity pool. Again, this is not something that we would expect to change so no potential for rate increase here either.

Gilt Yields: There is an un-doubtable link between Gilt Yields and annuity rates, gilts have always been the benchmark for annuity rates and they are currently trading at an all time low.  This is fuelled by uncertainty in financial markets which is cause by the Euro Zone debt crisis, it would be reasonable to assume that these can only fall so far and we may well be seeing rates close to the bottom now.  So, as the green shoots of recovery start to show, the long term gilt yields should in turn start to show more positive numbers.  Should this happen, annuity rates are expected to follow.  This is a positive outcome but it may take several years to take effect.

Conclusion: There are several factors that have forced annuity rates down such as the reduction in the annuity pool and average life expectancy increasing, these are facts that are not likely to change and it would be unrealistic to expect annuity rates to ever return to the figures we have seen in the past.  However, the effect of the debt crisis and falling gilt yields cannot be overlooked, these rates will recover at some point and will have a direct effect on annuity rates, but it is likely to take some time for this to take effect. So for 2013, expect rates to remain low.

Contact us for more advice about annuities and how to get the best out of yours.

The choices you make when deciding on the most appropriate income at retirement are decisions that will stay with you for the rest of your life. It is vitally important you make the right decision so professional guidance is always recommended.

Using our annuity calculator is the first step to ensuring that you make the right decision. It will give you an indication of the level of income available from the pension fund which you have accrued.

All personal pension providers should offer you an Open Market Option with your pension fund. This is basically your right to take your pension fund and obtain the best income from all the other pension providers, depending upon who is offering the best annuity rate at the time of your retirement.

The annuity calculator will take into consideration any features that you would like to add to your retirement income and it will also consider any lifestyle or health issues before giving you an indication of the level of income that you can expect.

The first details that you will need to provide are your name and date of birth. In general terms, the older you are the higher the annuity rate. This is purely because as you get older your life expectancy, based on Government statistics, reduces. If you want to provide an income for your Spouse should you predecease them, their name and date of birth are also required.

Should you want us to contact you to provide you with advice regarding your annuity choice, we ask you to provide your contact details. At the very least, we will require your post code, because where you live also influences the annuity rate that you will be offered.

Once your basic details have been added, you move to Step 2 of the process, which asks for more information regarding your pension fund and how you would like your pension income to be structured.

The fund value you have available to purchase your annuity, after any tax free cash has been taken is key. You must always remember that it is possible that your fund could alter from asking for quotes to actually purchasing your annuity. We can advise you on how to minimise any fluctuations.

There are then a number of features which you may wish to add to your pension income. As previously mentioned, you may elect to provide an income for your widow/widower. You may want to guarantee that your pension is paid for a minimum period of time, even if you die prematurely. It is normally possible to guarantee that your pension be paid for either 5 or 10 years.

The final feature which you may wish to include is a pension which increases every year. If you thought that you were to live for a long time into retirement and you wanted your retirement income to keep pace with inflation, you could opt to have annual increases.

The important point for consideration when deciding on all these options, is that the initial pension you receive will decrease for every extra benefit which you add.

Please call us for any advice on annuities on 0800 848 8250.