“We have seen annuity rates decouple from bond markets in recent months, as annuity providers have held back from passing on the full extent of rising yields. The benchmark rate for a 65 year old male is currently 7.7 per cent, we think that there is a strong argument for rates dropping well below 7 per cent over the next year,” says the firm’s head of pensions research Tom McPhail.
Along with gilts, corporate bonds form the underlying investments used to pay annuities. With the credit market seizing up, the yields on corporate bonds have spiralled to unprecedented levels and this in turn has allowed insurers to increase annuity rates. Government measures to inject liquidity in to the market and kick start lending again will hopefully bring interest rates down. When the market does start functioning again, bond prices could jump as yields drop back. This is likely to bring downward pressure to bear on the annuity rates.
In addition, Hargreaves Lansdown believes that increasing longevity is constantly forcing insurers to lower rates as annuities will have to be paid for longer. Annuities are also undergoing a rapid evolution towards an individual pricing approach where the actual rate is dependent on the investor’s health and lifestyle, as seen by the rise of enhanced and postcode annuities. This drags down rates for he healthy and those living in more affluent neighbourhoods. “In as much as it is possible to be certain about anything at the moment, there appears to be a strong possibility that annuity rates will fall over the next year,” McPhail adds.
In order to help pension investors who are approaching retirement, Hargreaves Lansdown has produced a retirement fact sheet on the current market conditions and investors’ options.