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Annuity Trends

It is not just equity prices which have fallen as a result of the financial fallout of the global coronavirus epidemic, annuity rates have crashed as well. As a result annuity rates have fallen by 7% since the beginning of the year.

Falling gilt yields

Annuity rates are priced with reference to the yields on long term fixed interest investments such as gilts and corporate bonds.

The benchmark gilt yield (15 year gilt as quoted in the FT) has fallen through the floor. At the beginning of 2020 the benchmark gilt yield was just over 1% but recently it fell to 0.4% which is the lowest level since I started recording yields 20 years ago.

Gilt yields have fallen as direct result of the flight to quality as investors sell equities and buy secure gilts. As more people buy gilts the price rises but the yield falls.

Looking ahead at what may happen in pension industry in 2020 I see very few things that will have an immediate impact on advisers or their clients but I do see some policies and initiatives which will result in important changes in the future.

In the December 2010 Queen's Speech, the Government reintroduced pension schemes bill and it mentioned the creation of a legislative framework to allow people to access information for most pension schemes in one place for the first time. Therefore, it seems the Pension Dashboard has become one step nearer but are we are still left waiting to know when and how.

I am hesitant to predict the 2020 trend for annuities as I have got it wrong in the past. I did predict 2017 would be the year of the annuity but I was clearly wrong about that.

However, there are good reasons to think that 2020 will be a better year of annuities as the Brexit uncertainty fades away. Therefore, providing the UK’s finances don’t end up in a mess I predict a slow increase in annuity rates and more retired investors converting their pension pots into income by purchasing annuities.

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