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Billy Burrows: Can 2018 be the year of the annuity?

At the beginning of last year, I asked whether 2017 would finally be the year of annuity, after several of declining rates and popularity. Unfortunately, they are still in the doldrums and there are few signs things will improve in the next few months.

I do hope to report later in the year that the tide has turned but, before that, several things will need to happen.

First, bond yields need to increase. Throughout 2017, the 15-year benchmark gilt yield remained below 2 per cent.

Yields have been low since the credit crunch in 2007. Before then, they were over 5 per cent and the benchmark annuity (£100,000, joint life 2/3ds for ages 65 and 60 and with level payments) was paying about £6,500 per annum. That is £ 2,000 or 30 per cent less a year than an annuity today.

It is unrealistic to expect a return to pre-credit crunch yields but if they rose to the 3 per cent level and annuity incomes increased by 10 per cent, annuities would start to compare more favourably with drawdown.

Which leads me to condition number two: drawdown will have to become less popular. The stockmarket has been buoyant over the last few years, meaning drawdown funds have increased in value. However, a fall in equity prices and a period of volatility would prompt more investors to review their risk profiles and perhaps look for some income guarantees.

Thirdly, advisers and clients will need to be convinced of the advantages of annuitisation. This is no easy task as the reputation of annuities has been trashed since pension freedoms. In all fairness, their reputation had been under attack for many years before that but pension freedoms provided the final nail in the coffin.

There is lot of misinformation and biased criticism around annuities. Annuities are still the only policy that can guarantee income for life with no investment risk.

The problem is not the annuity concept itself – i.e. mortality cross subsidy – but the low rates of interest. That said, it is important to remember that the benefit from mortality cross subsidy is relatively small at younger retirement ages, which means annuities are better suited to older people.

The case for annuities will grow stronger over time as long-term interest rates increase, the risk of investing in equities becomes more apparent and retirees realise just how important guaranteed income is.

Billy Burrows is retirement director at Better Retirement

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Not that I am a journalist but the old journalistic aphorism seems appropriate here. “Whenever a headline asks a question the answer is invariably no”

  2. Quote: ‘Yields have been low since the credit crunch in 2007. Before then, they were over 5 per cent and the benchmark annuity (£100,000, joint life 2/3ds for ages 65 and 60 and with level payments) was paying about £6,500 per annum. That is £ 2,000 or 30 per cent LESS a year than an annuity today’

    I think the word ‘less’ should read ‘more’?

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