Annuity rates do not move in vacuum and if yields are going up, equities may be going down. This means some people may end up with a smaller pot with which to buy a higher annuity.
My view is that annuities have probably peaked, because the market does not expect many more interest rate hikes. If rates and bond yields start to fall, so will annuity rates.
Therefore, this is an interesting and challenging time for serious retirement planners — should they advise clients to arrange annuities instead of investing in pension drawdown?
This is one of the most difficult decisions in retirement planning. Leaving aside the simple annuity versus drawdown comparison that normally translates into guaranteed income or flexibility and lump sum death benefits, there are a number of important issues to consider; for example, income sacrifice and peace of mind and security.
Income sacrifice is an interesting concept. In simple terms, when rates are high, most people who take income by way of pension drawdown probably end up getting less income compared with an annuity.
This means that many drawdown investors are making the decision, consciously or without realising it, to accept a lower income than they could have had in order to benefit from income flexibility, investment control and the option to leave money to their family.
There is nothing wrong with this and very good reasons why drawdown is a good idea, but if the question is reframed and people are asked what they prefer: more money while they are alive and can enjoy it, or less income now and more money to the family when they die — I wonder what the answer would be?
There is another type of income sacrifice where people lose out on income by delaying their annuity purchase in the hope that rates will get better.
Now annuity rates are paying a high level of income and are a viable alternative to pension drawdown, it can be argued that most people should have some annuity in their retirement income portfolios because annuities are the only way to get the elusive peace of mind and financial security.
Billy Burrows is an adviser at Eadon and Co and hosts the Annuity Project
