Annuity Rates 2013
UPDATE JULY 2013
There has been a recent increased demand for fixed term annuities with wider coverage in the press. Fixed term annuities allow you to delay the decision of locking into an annuity rate for life. You can simply take an income for a fixed term, usually between 3 and 25 year and then shop around again with your fund once it matures.
Fixed term annuities have several advantages over conventional annuities and are preferred for a number of reasons.
D elay purchasing an conventional annuity because there is an expectation rates will rise – With the floor of annuity rates reached for now, the trend seems to be moving back upwards. If you’re in a position where you need to do something with your pension fund now, because you have stopped working and need the tax free cash or income, there are more choices than just a standard annuity. Many people don’t want to commit for life and lock into an annuity rate now if the expectation is that they’ll be a rise over the coming months and years. Once you decided to take a standard conventional annuity you can’t change your mind at a later date, so what are the other options? A fixed term annuity allows you to unlock your tax free cash and start taking an income, but then gives you a second bite at the cherry in future years. If for example you take a 5 year fixed term annuity, you’ll receive an income during the term and then get back a guaranteed maturity amount at the end. If annuity rates have risen when it matures you’ll be able to purchase an annuity at that point and potentially lock into a higher income rate.
D elay an annuity purchase as you’re in good health – one thing we can be sure of when we get older is a deterioration of health. If when your looking to buy an annuity and you’re in good health, you’ll be offered the lowest rates on offer for your age. If then 4 years down the line you develop high blood pressure for instance, you can’t go back to your annuity company and ask them to factor this in. When buying an annuity, insurance companies look at your medical history to determine how long they expect to pay you for. Medical issues shorten life expectancy and therefore determine higher income rates when you purchase an annuity. If your fit and health when you retire, a fixed term annuity for a number of years could delay locking into a lower annuity rate now and potentially allow you to take advantage of enhanced rates in the future, if you develop medical issues during the fixed term.
T aking no income – many people want to release the tax free cash element of their pension fund but have no need for the income at that time. Maybe you wish to carry on working for a number of years but need the tax free cash to do some home improvements or buy a car. If you take a standard annuity, you’ll be taxed on the income you don’t need and it may even take you into a higher tax bracket. With a fixed term annuity you could release the tax free cash, take no income for 5 years (if that’s how long you expect to continue working ) and then purchase an annuity with the matured funds.
Fixed term annuity have no investment risk. When you take your options at the outset you’re given a figure you know your fund will mature at. It won’t fluctuate and isn’t at risk.
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As you come up to retirement in 2013 what does the annuity landscape look like? There have been significant changes in 2012 and there are some more milestones to happen this year.
Changes in the form of the EU Gender Directive effectively equalising male and female annuity rates promised a big shock for male annuitants. There was talk of a decrease in rates by as much as 15% for those retiring after 21st Dec 2012. The reality, at the moment isn’t as bad. There is however expected to be some volatility in rates during the first few months of 2013 as annuity providers settle their pricing strategies. Some providers have only dropped rates by 1% and the biggest movements have only been about 6%.
To obtain the best annuity rates in 2013, retirees need to do their homework. This year sees the new code of practice from the ABI (association of British Insurers) come into effect. This states that all pension providers should encourage retirees to shop around by using the open market option. For too long pension companies have simple sent out a default quote in the hope that less financially astute pensioners would simple sign a form and send it back. This practice has left thousands of retirees with significantly less income than they would have obtained by shopping around for better annuity rates.
The code also provides guidelines to encourage retirees to seek an enhanced annuity. This is where past medical history or lifestyle habits such as smoking can enhance retirement income. As life expectancy may be less, more income should be paid.
The overall picture on annuity rate levels continues to be on a downwards trend. Increased life expectancy together with tough economic conditions keeping gilt and interest rates at historic lows. The good news is that there are other options for those who don’t want to lock into a rate at this time. Fixed term annuities and income drawdown are two alternatives, but ones which should always be discussed with a qualified independent financial advisor.