Annuities - where do you think rates are going?

ctdctd

What do you think annuity rates are going to do over the next year or so?

Best to buy tomorrow or wait a few months?

Backstory - I'm a couple of years off retirement age, single, no dependants and am close to pushing the button on a lifetime annuity at around 6% with a 3% escalation.

Reasoning is to give me certainty of income going forwards - I'm not using all of my pension pot so will have other options if needed later.

Opinions invited!

mrklaw

why are you waiting? if you’re waiting for better returns why not just stay in equities and do drawdown? if you’re buying an annuity for certainty of income and the rates now do the job you want them to do - then surely buying now means that job is done and that income is secured? otherwise its just speculating.

heck I wish I could buy a future dated annuity to start in a couple of years - I have the money now but still working. (went gilt ladder instead as a close approximation)

MK62

If certainty is what you want, then it would seem that buying now would give you that…….nobody knows for sure which way annuity rates will go from here, so all you'll get is a bunch of opinions, which might all be wrong, inc mine…..which is that while rates might rise further, they are already at a multi year high, and there is a danger of them falling from here…..

ctdctd

https://forums.moneysavingexpert.com/discussion/comment/82132680#Comment_82132680

"heck I wish I could buy a future dated annuity to start in a couple of years"

You could buy one now with annual income paid in arrears - that's one of your 'couple of years' sorted! 😁

OldScientist

There are two components to annuity payout rates - age and gilt yields. Going from 65 to 67 (assuming you are about 65) will increase the payout rate from about 6.0% to about 6.3% (i.e., a fairly tiny, but known amount). A downward change in gilt yields will drop the payout rate (the amount of drop depends on a number of assumptions, but on a crude calculation a 1pp change in yield will lead to a change of roughly 0.6pp in payout rates).

If you can secure the income you need now, then why take the risk?

Finally, have you considered an RPI annuity instead - this removes the inflation risk that an annuity with a fixed escalation has and, currently can be obtained with a payout rate only slightly less (the rate for a single life at 65yo RPI is 5.6%).

ctdctd

https://forums.moneysavingexpert.com/discussion/comment/82132722#Comment_82132722

Thanks, I've considered RPI linked but I see that RPI is being combined with CPIH in 2030 which will have the effect of reducing the RPI figure by 0.5-1%. I'm prepared to risk that there won't be runaway inflation in my lifetime - if there is, I have the rest of the pension pot ready to deploy!

Triumph13

I would be leaning towards RPI instead too. Another a period of high inflation is more than possible.

I would also buy now and just increase your pension contributions whilst still working.

zagfles

If you're going to buy an annuity at retirement the usual thing to do in the years leading up to retirement is to move into a gilts based fund or buy mid dated gilts, which will hedge annuity rates. If gilts go up in price, annuity rates will drop and vv.

The other thing to consider as above is an index linked annuity. A flat or fixed rate escalation annuity doesn't provide certainty of spending power, it may provide certainty of the number of pounds you get but not what you can buy, which is far more important. (Then of course you'd use index linked gilts or an IL gilts fund in the lead up)

dunstonh

What do you think annuity rates are going to do over the next year or so?

predicting the unpredicatable is largely pointless. You don't know what events are coming along that could impact on gilt yields.

Some thought we hit the peak in 2022, some in 2023, some in 2024, some in 2025 and some in 2026.

Best to buy tomorrow or wait a few months?

what do you think is going to happen to gilt yields in that period?

what is Donald Trump going to do next?

Backstory - I'm a couple of years off retirement age, single, no dependants and am close to pushing the button on a lifetime annuity at around 6% with a 3% escalation.

rather than buy the annuity now when you are several years younger and getting a lower annuity rate due to age, you could change the investments to gilts and use that as your hedge.

Alternatively, you could buy the annuity on a platform and not draw from the cash account. You could even reinvest the income paid within the pension until it is needed.

Thanks, I've considered RPI linked but I see that RPI is being combined with CPIH in 2030 which will have the effect of reducing the RPI figure by 0.5-1%. I'm prepared to risk that there won't be runaway inflation in my lifetime - if there is, I have the rest of the pension pot ready to deploy!

With globalisation in retreat and the major powers holding smaller countries to ransom, inflation is expected to be higher than the last 25 years. The UK is particulary sensitive to global affairs and inflation is likely to be where it plays out. Plus, the UK Government is showing no signs of getting spending under control. So, a devaluation is likely at some point in your lifetime. I would go RPI personally.

Triumph13

Or you could always hedge your bets. Buy an annuity now with part of your fund, reinvesting the income in your pension, then buy another one when you retire.

ctdctd

https://forums.moneysavingexpert.com/discussion/comment/82132838#Comment_82132838

Interesting - I hadn't thought about that. Will investigate!