AVC's

Lin53

Hi
I have an AVC which was due to mature in 2003 but have delayed it as everyone one said rates were so bad. I am now looking at the situation again as I am told rates are currently 'good'. However, the financial market seems to be in some flux right now, so my key question is: how are the rates determined? I know it is something to do with the relationship between interest rates, the stockmarket, and government stock. But which cisrcumstances mean it is a 'good time', and which a 'poor time' to activate it? Perhaps I should wait longer?? Help gratefully received.

dunstonh

I am now looking at the situation again as I am told rates are currently 'good'.

They have been rising for the last 3-4 years although recently they have been going up almost weekly. Last month some were changing almost daily.

However, the financial market seems to be in some flux right now, so my key question is: how are the rates determined?

interest rates, gilt rates, actuarial calculations, profit margin, whether the company wants annuity business or not, health, smoker status, postcode, terms of annuity.

The stockmarket has no direct impact on annuity rates. However, the stockmarket will have influences on some of the things mentioned above so there can be a slight knock on effect.

But which cisrcumstances mean it is a 'good time', and which a 'poor time' to activate it?

there is no way to tell other than to use hindsight.

It is possible that even though rates have gone up and your fund value has gone up you would have been better off taking it 5 years ago. it may be that if you dont need the money you dont take it. There is no 100% rule here. You just have to cost the options and make assumptions, some based on estimates and go with it from there.

Lin53

Thanks Dunstonh for your response. Have to admit I am still confused though! It seems very complicated... I just hoped there would be more info on which I could judge whether to wait or not, eg last month the "rates were going up almost daily" - WHY? And are they still going up? Thanks for your response anyway.

EdInvestor

If your AVC is invested in equities, then the value of the fund is determined by the state of the stockmarket, which is currently weak, so your fund has probably gone down in value.

When you convert your fund into a pension income you use the accumulated fund to buy an "annuity".Annuity rates ( which determine the amount of income you get for your lump sum) are set mainly by the yields on gilts (Government bonds).

Gilt yields tend to respond to what's happening to bank interest rates, which in turn tend to set based on inflation trends.That is, if interest rates are coming down (as they have been) gilt rates will be going up (as they have been.)

But if the value of your pot is going down (because of the stockmarket), then the fact that it will earn more when it's converted into an annuity (because of the gilt market)may not translate into a better income, because the two can cancel each other out.

Some people like to switch the investment of their AVCs and pensions into gilts and bonds in the run up to retirement, so that the two are aligned and you don't get this effect.

The win win scenario is when both gilt yields and equities are going up and interest rates are coming down.That will be the best time to convert.