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At what rate do annuities become a good buy?


In last month’s column, I was downbeat about annuities because of low yields, a disappointing outcome from the FCA’s enhanced annuity review and the U-turn on the secondary market.

This month, yields have increased, and I am more upbeat. Let me be clear: annuities are a long way from getting to the level where they become a serious competitor to drawdown. But there appears to be a light at the end of the tunnel.

During August, the yield on the benchmark 15-year gilt fell to 1.05 per cent; thankfully, not going below 1 per cent. Now the yield is 1.87 per cent and may break the 2 per cent barrier. Yields are rising on the back of the unexpected news around Brexit and the US election.

When I first started collecting annuity data back in 1990, yields were above 10 per cent. By 2000 they were about 5 per cent and by 2015 2.5 per cent. It is unrealistic to expect yields to return to the heady days of the past, but the recent increase raises an interesting question: at what level do annuities become a good buy?


To make sense of this I need to define what I mean by a good buy. Back in the day, we would compare the returns from annuities with the returns from drawdown on the basis that, in most cases, an annuity was a hard act to beat.

To put it simply, if in 2000 the income from a £100,000 joint life annuity at age 65 was about £7,000, this meant a drawdown plan would need to grow by well over 7 per cent (before charges) to maintain the capital value. Today, the same annuity is about £4,200, so a drawdown pot only has to grow at 4.2 per cent to keep its value.

Obviously, these figures are simple and take no account of the mortality drag and the fact annuities have no lump sum death benefit. But they do show that as annuities rise they become more competitive against drawdown.


What is more, if equity prices start falling because of the uncertainty ahead, drawdown investors could see the value of their funds fall. Drawdown is more flexible than an annuity but it also riskier.

I personally think my benchmark for a joint life annuity at age 65, which is currently paying £4,200 per annum, needs to increase to about £5,000 per annum before annuities become a good buy. The last time annuities were at this level was in the summer of 2015 when yields were about 2.5 per cent.

In conclusion, although I think annuities have a long way to go before they can be regarded as providing a good return, advisers and their clients may have to start taking them more seriously soon.

Billy Burrows is director of Retirement Intelligence



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There are 7 comments at the moment, we would love to hear your opinion too.

  1. I was recently on a panel with an insurance company bod who said that with annuities “the insurer takes all the risk”. Here’s the simple math: A 65 year old MSL annuity pays 5% in round fugures. If the annuitant is a nil rate taxpayer he has to live 20 years to get his money back. At 87 he’s statistically dead. That’s SOME risk insurers are taking! Flexible drawdown was the one great act of George Osborne for which every pension save should be thankful. The insurers are squealing. Tough! Cut your profit margins and sharpen your pencils or resign yourselves to getting next to no annuity business. We still write annuities for clients who have to have them for whatever reason, but it guts me every time, because I know they’re a lousy deal.

  2. Typo above: ‘save’ should read ‘saver’ – sorry!

    • I pretty much agree with you Neil, but Billy also has a point too. There is effectively a break even point. In the meantime however, there remains an argument for a balance of secure income which can come from a combination of state pension, an annuity and/or a final salary pension. Once essential spending is significantly covered, say 80% of income needs, then tehre is currently a logic in the rest being held in drawdown if it only needs to make a modest return to cover the 20% income shorfall, but leaves flexability for potential future increases, lump sum withdrawals, income tax planning and improved death benefits.

  3. Neil, is the man in your example statistically dead or actually dead? Half of 65 year old men in average health are expected to live to age 90, 75% to to 96. If in good health, add three more years. What does the risk look like now? Male whole population life expectancy at 65 may be 87 but the average pension saver (and IFA client) is wealthier than the average person so would be expected to live longer.

  4. Neil F Liversidge 29th November 2016 at 3:32 pm

    @C CLarke: Indisputably some will live longer but from talking to innumerable clients over the years I can tell you that the vast majority would rather make the most of their fund in the 10-15 years after age 65, even if it means living on the OAP thereafter. Not many are doing foreign holidays after age 85.

  5. Current DD yield 2%.But no guarantee that the fund won’t, or already has, depleted Even at 100% GAD a 65 year old may run out of money by the time he is 84. Then what of his spouse if she outlives him? Even a 70 year old will run out of money at 86. Who is going to guarantee that these people will be dead by or before then? Is this a gamble worth taking? When you get to this age this is when you need the best income possible. How long before the triple lock goes, you have to pay for some healthcare and the NHS is no longer entirely free?

    I have seen joint life (100% spouse) annuities at 5.2% for 70 year olds. And let us bear in mind that it is highly likely that annuity rates will increase over the next 12 months. Indeed just today Hodge have announced a rise. It is also worth noting that not everyone solely has a pension. Those who have been wisely advised have other assets – not least ISAs whose income is now tax free. (And perhaps bonds whose tax is deferred for 20 years). This perhaps is market risk enough for those people.

    As I never tire of repeating; it is little wonder that the industry is so enthusiastic about Draw Down. It lines the pockets of both providers and advisers admirably and the current low historical annuity rates make it an easy sell. I wouldn’t like to be an adviser who has pushed a client into drawdown if equity markets decline significantly and interest rates start to rise.

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