Annuity rates post Brexit and the US election

With so much happening in the world is anyone interested in what is happening to UK annuity rates?

Whilst most people have more important things to worry about, those approaching retirement or who are drawing an income from their pension pots should be very interested in the current state of the annuity market.

The decision whether to purchase an annuity or take an income from a pension drawdown plan is one of the most difficult decisions in personal finance and one that has far reaching consequences so it is important to understand what is happening in the pension market.

Annuity rates may be affected by the US election result

At times of economic and political uncertainty there is normally a flight to quality which means that investors shift from equities to bonds and this results in a fall in gilt yields.

On Wednesday 9thNovember global financial markets responded negatively to Donald Trump’s election success but by Thursday markets had mostly reversed these negative reactions. It seems the markets may be taking the unexpected election result in their stride so we might avoid a post Brexit style fall in yields.

Although annuities are invested in corporate bonds and even property, the yield on long term gilts is the benchmark for pricing. This means that if gilt yields fall, the income from annuities also fall. The reverse is also true.

It is too early to come to any firm conclusions but it does seem that the slow but steady rise in annuities (see below) seen over the last few weeks will probably be put on hold and may even be reversed for a short time.

In the longer-term some analysts are forecasting higher US interest rates if Trump's key policy priorities which include generous tax cuts and higher infrastructure and defence spending, along with deregulation for banks come about.

Annuity rates are bouncing back after Brexit

The unexpected Brexit vote in June resulted in annuity rates falling off a cliff. In the last week of July annuity rates from all the top providers fell by between 2 and 3% a result of the dramatic drop in bond yields following the unexpected referendum vote. Since then annuity rates have bounced back as the benchmark 15-year gilt yield has risen from just above 1% in late August to 1.7% on 9th November. The benchmark annuity* rate has also reason. It is now paying £ 4,086 per annum gross for £ 100,000 purchase, which is a rate of 4.086% compared to £ 3,928 at the beginning of September.

This might seem a small change but translated into real money, somebody with a £100,000 in a pension pot can now get about £150 a year more for the rest of their life compared to September.

The rates are still well down compared to a year ago and rates will not get back to this level unless there is a significant increase in yields but every increase is a step in the right direction.

The table shows how annuity rates have fared over the last 5 years.

*£ 100,000 purchase, joint life 2/3rds annuity, ages 65 and 60 with level payments.

What is the short and long term outlook for annuities?

Events are moving very quickly and it is very difficult to form a view about the future. My own views are changing as events unfold. In the past there have been other factors influencing annuity pricing such as Solvency II, increased life expectancy and the impact of pension freedoms. This downward pressures now seem to have less impact so the fate of annuity rates rests with the direction of travel for yields.

One force which could impact on yields is the likely increase in inflation resulting from the post Brexit weak pound which makes imports more expensive. The price of Marmite is going up so the income from annuities should also go up. The connection is that inflation not only increases prices but also results in higher yields.

Conclusion

The impact of Donald Trump in the White House should not change the slow but sure increase in UK annuity rates in the longer term but it might stall the trend in some short term.

Annuities have been trumped by drawdown since pension freedoms but if rates continue to rise it might be time to play the annuity card.