Understanding current annuity rates

By | December 11, 2012

When you convert your pension savings to an annuity, you receive a fixed income over the period of the pension. Just like other products in the financial markets, your rate of return is determined by market supply and demand. So why are annuity rates currently so low?

In the past 12 months prices have been at historically low levels. A large part of this is due to the global economic climate decreasing yields on government bonds and other traditional investments. Annuity rates in the UK are expected to fall even further following a European Court of Justice ruling which prohibits financial providers from differentiating prices based on gender. Until now, actuarial calculations have meant men have received higher payments than women. This change is expected to drive providers to even lower yielding of investment products, leading to even lower pension returns.

With such low rates, should you delay converting a pension to an annuity?

If you do not require a steady income immediately, you may choose to delay converting your pension to a fixed income stream until rates have started to climb again. The risk of this approach is that most economic indicators suggest rates will remain at low levels for the short to medium term. Delaying purchase may mean you miss out on hundreds of pounds income while you wait and as rates continue to decline. It would then require large increase in prices to offset this.

Shopping around

One of the most important steps you can take is to understand what options are available to you. The UK consumer advisory, Which.co.uk has suggested that one in three people fail to shop around when looking to buy annuities. From 1 March 2013 members of The Association of British Insurers (ABI) have to comply with an improved code of conduct designed to better inform the consumer about financial products.

You are not required to purchase an annuity, but if you wish to do so a qualified financial adviser will be able to look at your personal circumstances and advise you of the advantages, and disadvantages, of the various options available.

Annuities are not flexible financial products, so before committing yourself to their purchase, the best thing you can do is understand what it means for you and what the options are.