The year 2009 looks to be a promising year for annuity providers. Over the last few years, the UK annuity market was able to enjoy some sort of resurgence—industry insiders claim that it is in a healthy state and prospects look promising. And in the coming years, it is highly expected that more and more people will take interest in annuities, as the generation of baby boomers reaches retirement age. The current number of defined-contribution pension savers is expected to skyrocket in 2012, thanks to the arrival of personal accounts. And aside from consumers, adviser interest in annuity products will experience an increase due to the latest product innovations like enhanced and impaired life annuities and ‘third way’ products.
However, just how long will this resurgence last? According to some, there are still challenges that lay ahead of the annuities market. One of the obstacles that may hamper annuities from truly reaching their previous highs is consumer education. Apparently, a huge number people in the UK (including money-purchase pension savers) have little or no understanding of annuities. And in worst cases, these people do not even realize the need and importance of buying one. Another problem is that pension savers are not making enough contributions to offset the effects of higher life expectancy and are likely to end up with a lesser pension income than they were expecting. At the same time, the rates and competitive pressures will keep on squeezing the profit margins of conventional annuity providers, as the number of ‘healthy lives’ decreases while the non-conventional sector increases. Since an annuity purchase is required for all UK citizens it is important to take a closer look where annuities may end up in the future.
Let’s examine the rates for annuities—the top annuity rates are close to regaining their former grandeur and are actually up over 6% since their reported nosedive. Most companies have improved their competitive position, with the improvements considered above average. Such improvements in the rates, as they say, came as a result of the substantial increase in long-term gilt and bond yields. Despite the counteraction of higher life expectancy, annuity rates may go up a little bit more. If, for some reason, the yields stop going up, the improvements of annuity rates will also come to a screeching halt.
Now if the interest rates for annuities fall, experts have warned that your retirement income could drop by 10%. And new pensioners are not exempted from this. While it is true that over a million pensioners is expected to convert their pension pot to annuities next year, the income that can be generated from their retirement fund may end up lower than what they had expected. Yes, annuities are up today—but pensioners cannot let their guard down, as experts also believe that there is a possibility of a dramatic fall in interest rates and bond yields in the future. For this reason, it is recommended that you get yourself an annuity quote as soon as possible so as to get a better value for your retirement fund.
So the bad news is out—soon, the value of your pension will be hammered by the stock market. After doing your best in saving for your retirement, the income that you can get from the said fund will most likely suffer because of the falling interest rates. And things look bleak, as the Bank of England looks to chop down the interest rates even more. So what are you to do?
For one, you can simply buy a property and forget about pensions. In fact, this has been the slogan of most buy-to-let investors over the past decade. After paying off the mortgage, the property provides a rental income in retirement, while the capital remains with you. While the said income is taxable, it will certainly come in handy when the interest rates for annuities plummet.
Another thing you can do is deferring from taking your pension. Unbeknownst to many, the rates for annuities can improve significantly the longer you put off buying. Until you are forced to get pension when you reach 75, you need not buy anything—yet. The only drawback is that relying on basic State Pension may not be enough.
Before you take out that annuities calculator, why not consider working longer? If your company will allow you to do so, and if you’re healthy enough, then it is advisable that you go for it. After all, your company is basically required to consider a request for continued working, even when you’re already 65 years old. Just remember that your company can reject the request without giving specific reasons.
Next up, be sure that you have done your homework, and have done the necessary legwork when it comes to annuities. Remember that doing sufficient shopping for the best deals will do you good. It is truly unfortunate that many people with money purchase schemes and related products immediately take offers of annuities from their savings provider. When you shop around for better rates, there is the possibility of increasing your monthly income by 10%, which you can enjoy for the rest of your life.
Think about ‘drawdown’ too, as these policies keep your pension money invested, even after you have retired. This, in turn, allows your money to grow. But be wary for the fall of the stock market can still affect you. Variable annuities, which are considered popular choices in the US, can also give you guarantees when it comes to the value of your investments once you reach 75. Should anything happen to you, your estate/spouse gets your capital. However, independent financial advisers warn you that these can be a bit pricey, with charges of 2.5% a year—perhaps even more.
Nonetheless, as a pensioner, you have to be on your toes whenever annuities rates are concerned. Be sure to consider all your options. After all, you’d definitely want to be in a healthy financial situation once you retire.
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