Is this a good moment to purchase an annuity?

toebone

I understand that annuity rates are high at the moment (why is this?). I have about £45k in a SIPP deposit (no equities, thank goodness) fund, which I set up in 2007/8, my last year of fulltime employment. I am now retired (age 57), and can draw my teacher's pension when we run out of savings cash.
Since the deposit fund will grow at only about the rate of inflation, it looks to me as though I should cash it in now for the best annuity rate. Any thoughts?

swiss69

My view is that Annuities are reasonable at the moment and could go down. I would certainly seek Independant Advice on the Open Market Option available. As your fund is unlikely to grow much, I would say that if you are happy with the income available then it should be a consideration. You may lose out if rates go higher but as with everyhting in life sometimes you lose!

MrChips

toebone wrote: »

I understand that annuity rates are high at the moment (why is this?).

Insurance companies take a view on how long you will live and how much investment return they will get on the money you give them, and then work out how much they can afford to pay you (also considering expenses they will meet in setting the annuity up and their profit margin).

As a rule, they will invest your money in bonds (usually government bonds) as they can't afford the risk of the share market [life insurance companies have strong capital requirements set by legislation and if they invested all your money (and the billions of pounds from people like you) in equities and they crashed they would be in big financial trouble].

Life expectancy for retirees has been reassessed upwards dramatically over the last decade and thus in general annuity rates have been falling as insurance companies realise they have to cut back their offers or risk running out of money while the member is still going strong in their 90s :eek:

Recently this has peaked and annuity rates will now factor in that most people have a good chance of a 25-30 year retirement. Therefore the chief influence on the annuity rate at the moment (ignoring individial factors such as age/sex/health/post code) is the assumed rate of investment return on the money over retirement.

As mentioned in the second paragraph the money will be mostly invested in bonds. Yields available on these increased recently, especially on corporate bonds, due to the credit crunch - basically you get a good rate as lending money to companies is perceived as higher risk (just like someone with a poor credit record will get hit with a high APR on their credit card). Government bond yields are also running at short term highs as they will be issuing a lot of debt to pay for all the bail outs and for future public spending while tax revenue is falling in the recession (high supply of bonds -> low cost of the bonds -> higher return).

Hence the insurance companies can get a higher return on your money, hence they can afford to pay you more. Annuity markets are highly competitive so they tend to pass on any higher rates they can or they lose out to competititors.