Annuitise now before rates tumble, says Hargreaves
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Investors approaching retirement should seriously consider locking into an annuity now to benefit from stockmarket gains before annuity rates tumble, according to Hargreaves Lansdown.
Investors have seen their funds soar as the average UK equity and managed funds have jumped 47 per cent and 31 per cent respectively since March’s low point.
Pensions analyst Nigel Callaghan (pictured) says there is now a high risk of stockmarkets losing ground but it is unlikely investors nearing retirement will be able to recover any sudden losses. As such, falling funds will inevitably mean a smaller retirement income.
He also says leading insurers have begun cutting annuity rates in recent months with the benchmark rate for a 65 year old dropping to under 7 per cent this month for the first time in two years.
Callaghan believes annuity rates will fall further before the end of 2009 due to the Bank of England’s quantitative easing programme as well as increased longevity.
He says the combination of impressive stockmarket performance and falling annuity rates means now is the optimal time to annuitise.
He says: “Retiring investors would ideally buy their annuity when their pension savings and annuity rates both peak to receive the largest possible income.
“There is a strong case that investors retiring today may enjoy great timing, benefiting from much bigger pension funds following the market surge and locking into better annuity rates than those available in the coming months.
“Even for investors who are a year or two from retirement, it may make sense to annuitise now, just to avoid the risk of that the stockmarket and annuity rates move against them between now and retirement.”
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Readers' comments (11)
Julian Stevens | 19 Oct 2009 12:14 pm
Lock into something that represents what is generally perceived to be very poor value for money before annuity rates deteriorate even further and you'll get even less income for your money. What a dismal state of affairs.
What the industry really needs to be doing is mounting as big a campaign as possible to consign the annuity trap to history. But then most of the industry has so many other things to worry about that it's hardly surprising that annuities aren't top of the tree.
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David Quy | 19 Oct 2009 12:23 pm
I agree with Julian Stevens and I believe that Solvency II will also create a market where annuity rates could drop a further 20% by 2012. Not the fault of advisers but who gets the blame!!
David Quy
Quy Long Financial Services Ltd
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Evan Owen | 19 Oct 2009 12:38 pm
My idea of great timing was when I locked my clients into 12% annuity rates when with profits had benefits and teh stockmarket was relatively stable, this is something the regulators later called 'pensions unlocking' and banned it. Anyone with a pension pot today must be wondering why they bothered to wait, or why they put anything into pensions in the first place. A radical overhaul of retirement income provision is required because we don't seem to be getting anywhere, all we have are an assortment of government created Titanics.
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Richard Ross | 19 Oct 2009 12:42 pm
won't the end of QE mean upward pressure on Gilt yields or have I misunderstood market economics?
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Fraser | 19 Oct 2009 1:13 pm
oh, great idea, lock in losses, then sit back and two years later as markets start to stable, real growth returns then tell your clients it was good idea....not forgeting the complaints from the selective memory brigade...yes review the funds, limit the downside but leave the door open....if not regret it.
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Anonymous | 19 Oct 2009 3:44 pm
I can see it makes sense to lock in some of the recent stock market recovery, but that doesnt mean you should jump into a LIfetime Annuity and lock into a product for the next 25 - 40 years, particularly if you consider rates are low now. You can now purchase a temporary or Fixed Rate annuity that gives you the opportunity to make a further choice or choice(s) for the client between now and age 75. And lets not be scared off my all this solvency II scaremongering, when q/e stops, inflation and rates will probably climb, but whats more certain is that up to half of our clients will suffer some form of serious illness between 65 and 75 that means they will benefit from impaired annuity rates in the future. So why would you lock in a client today, particularly if your client is currently a "healthy life" ?
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Anonymous | 19 Oct 2009 4:10 pm
Anonymous is correct. You can now buy an annuity for a fixed period of time (a Fixed Term Annuity) from Living Time which then enables you to keep your options open until later in life before you buy a lifetime annuity or ASP. Things do change during retirement e.g. health fade or loss of spouse which may benefit someone if they had not locked in to a contract for life at the point of retirement. There is an Offer More Options campaign supported by main organisations and a new trade body called PICA (actually supported by Hargreaves) which is going to put pressure on the government and the regulator to make shopping around for the most appropriate retirement solution the norm rather than the exception it is today.
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Julian Stevens | 19 Oct 2009 5:54 pm
It's hard to see how a reputable firm such as Hargreaves Lansdown can be talking about locking into a LifeTime annuity at a time when rates are so bad and the future is so uncertain.
Given that annuity rates are predicated principally on interest rates, it's hard to envisage that interest rates are likely to do anything but rise over the coming five years, even though the negative effect of steadily increasing longevity seems to be relentless.
A 5 year temporary annuity is a much better strategy and, although I don't wish to plug any particular company's product, one shouldn't overlook the Canada Life Annuity Growth Account which has the unique advantage of being allowed to run to the age of 85, not just 75, before eventual annuitisation.
In the present economic climate, keeping one's options open for the future seems to be a much more sensible than locking now into a LifeTime Annuity with which you'll then be stuck for life.
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Anonymous | 19 Oct 2009 8:36 pm
Annuitise later in life? But how? The problem is that many people seek certainty of income and therefore need to annuitise. But they do this in their primetime retirement years during their 60's. What they are probably looking for is certainty of income, but the ability to re assess their income needs at some point in the future.If they have a 50% chance of being able to buy an enhanced annuity in 10 years time (as a result of their health fading) it may be worth buying a fixed term annuity now to secure the certainty of income they are looking for and setting a maturity date at age 75?
Between now and then interests rates, Gilt yields and annuity rates may well have returned to an equilibrium position and neither be at the highs of the early 90's or the lows of the late noughties? The need to repay the debt built up by QE would appear likely to force up interest rates and Gilt yields progressively over the next few years, even if they do decline a little further in the short term as the Hargreaves article suggests?
VAs have had a go at solving the problem but the cost of the insurance you buy, the lack of investment choice and the restricted levels of income on offer don't make them attractive to the mass market. What's more the more sophisticated investor can probably get better value by blending a conventional or fixed term annuity strategy with drawdown to achieve the income outcome they are looking for?
Agree with Julian but think an investment risk free option such as Living Time may be a better option for the average retiree than AGA? The situation we are describing here is probably the very reason why they conceived it?
Don't suppose the others at Hargreaves necessarily agree with Mr Callaghan? Particularly those who have built their execution only investment platform business on the back of having the confidence to invest and remain invested?
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Anonymous | 20 Oct 2009 8:26 am
I wonder is Messrs Hargreaves and Lansdown will be acting on this advice and liquidating their own pension funds to facilitate annuity purchase. Perhaps Mr Callaghan can confirm?
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