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Every crunch has a silver lining

At last, some good news to emerge from the credit crunch – anyone lucky enough to be thinking about buying an annuity now will benefit from the highest rates on offer for some time.

As the Government tries to shore up the stalling mortgage market to raise money to lend to the mortgage lenders, it has been forced to issue gilts at increasingly competitive rates. Traditionally, some of the biggest buyers of gilts are annuity providers, as they need to invest in assets to offset the liabilities they are taking on. Gilts have traditionally fitted the bill and so as these rates rise, the rates that can be offered to customers also rise.

The Annuity Bureau reports that for some annuitants rates have increased by 4 per cent in just one month. A male, aged 60, taking a level annuity with £100,000 at the beginning of April would receive an annual income of £6,780 but the same purchase only 30 days later on May 1 would produce an income of £7,010.

Alexander Forbes Annuity Bureau director David Marlow says: “It is a good time to retire if you are seeking the best value annuity income, with rates at their highest for many months. The credit crunch has depressed the value of corporate bonds, increasing yields and allowing annuity providers to pass on the benefit to retirees as higher income on level annuities.”

Annuity-advisor.co.uk managing director Steve Hunt says there is a simple reason that rates have gone up – the Government is having to raise large amounts of money to deal with the credit crunch.

He says: “Because of the credit crunch, the Government is having to raise money to bail out the Northern Rocks and to lend more money out to banks if necessary. So cause and effect, that has had an impact on the gilt market, which means gilts are better. Better returns on gilts, which has conversely had an impact on the annuity market and means that annuity rates have improved.”

Hunt says this has led to a peculiar situation where annuity rates are up at the same time that interest rates are falling. He says: “You have a paradox at the moment, which you do not normally get, which is falling interest rates with increasing annuity rates. Normally, when interest rates come down, annuity rates come down as well. The reason why that trend is being bucked at the moment is that the Government is borrowing more money through the issue of more gilts.”

The bad news is that these increased rates have not been seen across the annuity spectrum. Investment-linked annuities and enhanced annuities have been left more or less unaffected. Marlow says that clients seeking some protection from inflation may be better advised to divide their funds between level and investment-linked annuities.

In the longer term, even level annuities will fall back. Hunt says: “They will drop again.”

Once the Government stops having to raise money and credit starts to open up the financial markets, rates will return to more normal levels.

Marlow says: “People approaching retirement should not be fooled into thinking that the current excellent rates will last. With longevity increasing, the long-term trend for annuity rates is likely to turn back down.”

The current rates on offer are just one reason for clients who are considering an annuity purchase not to delay their decision.

Earlier this year, Defaqto published figures illustrating the cost of delaying an annuity purchase. Its argument is that although every year’s delay of an annuity purchase increases the annual payment received when an annuity is finally purchased, the rate of increase is so low that it is almost never worth it.

The figures used to illustrate this point were valid in late March but the point remains the same.

A 64-year-old man in good health, taking a single level annuity without guarantee, would receive an annual income of £7,234 from a £100,000 pension fund. Using the same rates, a 65-year-old man would get an income of £7,410 a year from the same size of fund. Although this is an extra £176 a year, he would have given up one full year’s income, worth £7,234. On this basis, the annuitant would have to live for 41 years to make the latter purchase pay for itself.

Defaqto principal consultant for wealth and pensions management Matt Ward says even if the fund had remained invested in the stockmarket in the intervening year, a return of 6 per cent on the investment would mean that the annuitant would have to live for 12 years to make the delay pay for itself.

The same argument applies equally strongly to women. The Defaqto figures, when applied to a 59-yearold woman taking a single level annuity on £100,000 would produce an income of £6,228 but delaying a year would produce an income worth on £95 a year more, at £6,323. The difference would take 65 years to recoup.

Ward says: “When you decide to take your annuity is just as important as getting the right annuity from the right provider at the right price.”

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