First of all the good news; annuity rates give us the best deal since we had an economic collapse in 2008.
Annuity rates have reached an 18-year high of 7.75%, according to the Standard Life Annuity Rate Tracker.
Second of all the number being touted as the “pot to pension” convertor needs some understanding.
The rise means a healthy 65-year-old with a £100,000 pension pot could expect to receive up to £7,750 per annum, compared to £7,660 in April. That could work out to an extra £2,060 over the course of retirement.
I will, in a couple of months be a 65 year old male in reasonable health and I hope to be around for 25 years to come. In 2051, assuming inflation between now and then of 3%, the buying power of £100,000 today will have fallen to £47,761 (spurious accuracy I know). If inflation is 5% pa till I pop my clogs , then the buying power of £100,000 today will be £29,521.
Am I really risking my “pay” falling by between 53% and more than 70%?
Even if the Government met its target of 2% inflation over the next 25 years, I would see my pay fall by nearly 40% (in inflated adjusted terms).
The story may be good compared to recent times but really?
Really? In real terms the fall in value of income through to death is even worse for those who are 60. It’s not quite so bad for those who are 70. The greater improvements for “young” 60 year olds is because level annuities benefit more than changes in later life, there is less to lose from no “real” pay. These figures are “unreal”.
So is all this
Pete Cowell, head of annuities at Standard Life, said: “Annuity rates have reached the highest rates since August 2008, underlining just how much the retirement income landscape has shifted in recent years.”
It of course reflects the market view that inflation will go up faster than expected.
He said that at today’s rates, the time it takes to receive back the initial investment has significantly shortened.
Only if you take inflation out of the calculation
The payback period for a £100,000 annuity purchase with a rate of around 5% in 2020 would have taken around 20 years to repay. However, with today’s rates closer to 7.75%, that falls to around 13 years, depending on individual circumstances.
This “payback period” is of course why only 10% of us buy annuities. It is hard for us to get the concept of being repaid our money. This is why the “pot to pension” story is so hard for us to buy – why “money purchase” died out in 2014 and why Retirement CDC will be part of the problem.
According to the Tracker, a healthy 65-year-old male who bought an annuity in July 2026 at a rate of 7.75% could expect a total lifetime income of £156,000. For a female of the same age, the expected income was £177,000.
These numbers are feeble compared with the projections offered on drawdown. That is because annuities guarantee things and investments don’t. The gender difference (in favour of women is because the European Union required insurers to quote the same annuity rates for women and for men. It is the one thing that has been done to ease the pension gender gap as women tend to live longer.
Meanwhile, a healthy 70-year-old who bought an annuity during the same period could expect a rate of 8.43%. For a man, this would provide a total lifetime income of £135,000 while a woman could expect to receive £155,000.
Anyone reading this far will have worked it out that “flex and fix” may seem a good idea, holding on to investment growth till you are 70 or later means a higher guaranteed in later life.
Standard Life, who are behind this article in Financial Planning offer us this summary
Their commentator (Peter Cowell) concludes
“Trying to predict how the market might perform can be difficult and while rates have remained elevated over recent months, planning ahead is key.”
That’s true, but one prediction that I have for my next 25 years is that we will have inflation and likely more than the Government target of 2%.
We all know the argument that’s being had about whether we have a triple or a double lock but nobody suggests that the state pension is paid with no increases at all.
For most people, a pension is an income that keeps up with inflation and there is no reason why Standard Life could not show the income levels we’d have from the Standard Life Index if the annuity was paid with fixed increases or inflation linking.
The annuity story is unreal. The failure to explain the impact of building inflation into the annuity rates paid is tantamount to mis-selling. CDC will quote inflation linking on the wages it pays to people in retirement.