Annuity Rates Fall in Wake of Brexit

Pension income has taken a hit following Britain's vote to leave the European Union. Two annuity providers have cut rates - with more expected to follow

Emma Wall 27 June, 2016 | 10:01AM
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Retirement income has taken a hit thanks to uncertainty around the future of the British economy. Two pension providers have announced today that they will be cutting annuity rates following the Brexit vote on Friday – and experts expect more to follow.

Just Retirement and Retirement Advantage have both announced annuity rate cuts, with Just Retirement’s rates are down by around 2%.

Andrew Tully, Pensions Technical Director at Retirement Advantage confirmed: “We’ve reduced our annuity rates by 3% as markets adjust to the UK leaving the EU. Customers with existing annuities in payment are of course unaffected. Customers in the process of buying an annuity have a 14-day guarantee period which protects the rate offered.

“The uncertainty in the markets will feed through to the value of pension funds, drawdown portfolios, and the returns on annuities. Well diversified portfolios will weather the storm better than those invested solely in UK equities. The single most important thing to do is not to panic. If you can afford to sit tight and ride out the roller coaster, then great. However, if you need a retirement income you may need to consider a blend of guaranteed income using an annuity and drawdown. You always need to ensure you shop around to get the best deal.”

Tom McPhail, Head of Retirement Policy at Hargreaves Lansdown said that Gilt yields and annuity rates have been dropping steadily over the past year.

“The events of the past couple of days have given new momentum to that trend. For any investor planning to buy an annuity in the immediate future, it may make sense to do so sooner rather than later,” he urged. “Once you’ve obtained a quote from an annuity company, the terms are usually guaranteed for between two and four weeks.

“As always, make sure you shop around for the most competitive terms for your personal circumstance before committing to a deal. If you want to delay purchasing an annuity, but need to draw on your pension savings, then look at drawing an income from your funds using a drawdown arrangement instead.”

The Hargreaves annuity index tracks the top rate for a single life level annuity paid monthly shows how over the past decade the amount of income for life £100,000 can buy you at age 65 has fallen.

In 2008, before the global financial crisis £100,000 could buy you an annual income of £7,800. Today it buys a 65-year-old an annual income of £5,000. This is the lowest level on record. Annuity rates are based on the 10-year Gilt yield, so it is hardly surprising that incomes have fallen in line with interest rates, but the Bank of England base rate has been at 0.5% for the past seven years – and just last year £100,000 could have bought you an income of £5,800.

Near Retirement? Exercise Caution

With stock markets in turmoil following last week’s shock Brexit vote now is not the time to be cashing in holdings and crystallising losses if you can avoid it. Instead, try to ride out the storm and take advantage of tax efficient wrappers where possible to minimise the cost impact of any essential trades.

If you have to draw an income from your investments, do not touch the capital which may currently be depleted in value. Instead rely on the natural income from your portfolio; dividends off stocks, coupons from bonds, interest payments on cash savings.

If you have a long-term investment horizon and conviction in your assets market dips may be a sensible time to add to these holdings, but remember to take a sanguine approach to short-term performance, as these new holdings may well go down in value before they rise again.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar