Annuity rates to recover 4.5% in the short term

The announcement by the ECB that it was starting a €60 billion per month quantitative easing programme coupled with an unexpected fall in oil prices to under $50 a barrel is bringing Britain closer to deflation with inflation now at only 0.3%, the lowest level since records began. Yields on UK gilts remain higher than yields on European bonds offering a better return and attracting investors.

The above table shows 15-year gilt yields have recovered by 52 basis points in the last three weeks and annuity rates using our benchmark example are slightly lower than January at £5,494. This suggests annuities could recover next month by about 4.5%.

As an example this would mean our benchmark for a 65 year old with a fund of £100,000 buying a single life, level income currently at £5,494 pa could see this increase by £274 to £5,768 pa.

Alternatives to an annuity

As UK annuities remain near their all time lows and with the new pension changes applying from April 2015, it is possible to delay buying an annuity buy considering a flexible income plan.

A flexible drawdown plan offers the greatest flexibility offering an income from £Nil to maximum GAD which is about 50% more income than a standard annuity. In our benchmark example the income from an annuity is £5,494 pa and the drawdown is £8,250 pa. To reduce risk and volatility a protected fund can provide a smoothed return fund where the income is added daily.

For a very low risk option a fixed term annuity offers terms of one year or more with an income selected by you and a guaranteed maturity amount at the end of the term. The open market option remains available including an annuity from any provider, pension drawdown, taking the fund as cash or any other option available at that time.