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Annuity angles

Many investors are splitting their annuities to get a balance between security and potential for growth

Last year will be remembered as the year of the annuity crunch. The income from our benchmark annuity fell by 8 per cent during the year. In January 2009, a £100,000 joint life annuity for a man aged 65 and woman aged 60 with two-thirds spouse’s pension and level payments paid £6,439 a year but by December 2009 this had fallen to £5,897 a year.

The main reason why annuity rates fell so much was the big fall in gilt yields caused by the Government’s policy of quantitative easing.

The Bank of England has injected money into the UK economy by buying gilts and this has pushed up prices and consequently yields fell.

The 8 per cent fall in annuity rates during 2009 is the biggest fall since 2002 when rates fell by 12 per cent. Gilt yields rose towards the end of December 2009 as financial markets became more concerned about the state of the nation’s finances and the fear of future inflation.

This rise in gilt yields has caused some commentators to suggest that annuity rates might also increase and three of the main providers, Aegon, Aviva and Canada Life, have changed their rates but the changes were relatively small, with some rates going up and some going down. We remain less optimistic and believe that it is unlikely that annuity rates will change significantly in early 2010 unless there are more substantial increases in yields.

How to get better value from annuities
Investors can share some of the investment and longevity risk with the annuity provider in return for potentially higher annuity income. These products include with-profits annuities and flexible annuities, sometimes called variable annuities. The rationale is that annuities are a long-term investment and so should be invested in long-term assets such as equities and property, which aim to provide an effective hedge against inflation and potential for income growth. Many investors are splitting their annuities between guaranteed annuities and investment-linked to achieve a balance between security and potential for growth.

In conclusion, I do not think that annuity rates will rise very quickly this year but we hope that we are wrong. Even if annuity rates do go up for some as yields increase, others may see rates fall as postcoding takes effect.

Investors will need to get better value from their annuities by considering alternative such as with-profits, flexible and fixed-term annuities.

Billy Burrows Director The Retirement Partnership

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