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Rate war sends annuities to five-year high

A rate war is raging in the annuity market with rates reaching a five-year high and an unprecedented 39 rate changes already this year.

Hargreaves Lansdown pensions analyst Nigel Callaghan says investors who are planning to annuitise should consider doing so now.

He says: “The battle has been really heating up in recent weeks, with 17 rate changes in the last month alone, 88 per cent of them upwards. This is the highest that rates have been for five years.”

The yield for a 65-year-old male is now 7.66 per cent, 10.5 per cent higher than the yield two years ago which was 6.92 per cent.

Product providers fighting for the top spot include Prudential, Legal & General and Aegon Scottish Equitable.

Callaghan says that the rate war has been caused by a number of factors, including the credit crunch which has led to the spreads on financial corporate bonds widening. Yields on corporate bonds have increased significantly as the value of corporate bonds has fallen, he says.

But Callaghan says the high rates may not last as life expectancy is still increasing which could drive rates down.

However, he says if the economy nosedives and inflation rises, rates may stay at these levels or could go higher.

He says: “Equity values have recovered to some degree since the market falls in January and, looking at current annuity rates, we are starting to feel that this may represent an opportunity for investors. Yields on corporate bonds have widened significantly since last summer, which many retiring investors are taking full advantage of by locking into the highest rates since 2003.”

Informed Choice joint managing director Martin Bamford says: “The markets have recovered a bit but they are still very volatile. Making that judgment remains a very tough choice.”


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