Annuity Rates Hit Two Year High
December 20th, 2013
The latest MGM Advantage Annuity Index has revealed annuity rates have increased by 6% in the third quarter of 2013, the largest quarterly increase since the Index launched in August 2009. Overall, rates are up by 12% since January, helping annuity rates to recover to a two-year high.
The MGM analysis, which is based on the single life, level, non-guaranteed annuity that can be purchased with a £50,000 pension pot using data taken from Investment Life and Pensions Moneyfacts, means that the average annuity purchased today by a 65 year old would pay 11% more annual income than the equivalent annuity purchased a year ago, and an additional £6,111 total income based on a retirement term of 21 years.
The retirement income specialist also revealed that the gulf between the best enhanced annuity rate and worst standard annuity rate is around 38%, meaning many people with health or lifestyle conditions could be missing out on thousands of pounds of income. Furthermore, up to 70% of people at retirement could qualify for a better rate because of a health or lifestyle condition, but only 6% of retirees who purchased an annuity in the second quarter of the year without receiving financial advice purchased an enhanced annuity compared to 45% when advice was provided.
Ascertaining whether or not you might qualify for an enhanced rate due to a medical condition or lifestyle that could reduce your life expectancy, exercising your right to shop around for the best annuity rate on the open market, and seeking professional advice before buying an annuity are all therefore important tips to remember before converting the pension funds that you have probably spent an entire working life accumulating, into an income for life.
If you are aged at least 55 and looking to buy an annuity soon though, what else do you need to consider?
Whilst not exhaustive, particular consideration should be given to the following:
• Do you want to take a tax free cash sum from your pension fund? If so, 25% can normally be taken which can then be spent or reinvested to provide additional income. The options available with regard to your tax-free lump sum can be discussed with your financial adviser to ensure the right decision is made for your circumstances
• Do you want payments to be level, or increase each year, so that there is some protection against inflation? Many people elect to receive a level pension that does not increase on the basis that this provides the highest initial income and best value if they were to die in the early years. However, the purchasing power of the income could be seriously eroded by inflation over the long term so choosing an annuity that increases in payment each year could be more appropriate – especially if you are relatively young and in good health.
• Do you want to include provision for your spouse by selecting a joint life annuity, so that the income will continue to be paid if you were to pre-decease them? If so, the amount payable will normally be 50%, 66.66% or 100% of the amount that you were receiving at the time of your death and if an escalating annuity had been purchased, it will continue to increase in payment after your death.
• Would you want to include a guarantee period to ensure that the income is guaranteed to be paid for a minimum period regardless of how long you live after the annuity has been bought? If so, your annuity can normally be guaranteed for 5 or 10 years and the outstanding balance of the income payments due under the guarantee period can continue to be paid to any nominated beneficiary.
• Is a ‘capital protected’ annuity appropriate, so that a lump sum can be paid in the event of your death? If so, this type of annuity can provide better value for money than an annuity with a guarantee period should you die soon after buying the annuity.
• How often do you need to receive your annuity income – would you require a payment every month, every quarter or once a year?
Choosing the right type of annuity as well as getting the best deal available on the open market is a ‘once-only’ decision that cannot be changed after it has been made. A number of important decisions therefore need to be made before an annuity is purchased, and we would strongly recommend that these decisions should only be made after you have received suitable advice.