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| Waiting for better annuity deal 'risky'
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Jill Insley
Observer
Sunday November 25, 2001
Pensioners risk ending up worse off if they delay buying an annuity with their pension funds in the hope of securing a higher income, an annuities specialist warns.
When the rates of income paid out by annuities fell to about 5 per cent in 1998, many people approaching retirement decided to delay converting their pension fund into a fixed income in the hope that rates would improve. But three years on rates remain unchanged, and Stuart Bayliss, director of independent adviser Annuity Direct, says pensioners may end up with even lower rates if they wait any longer.
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The problem is caused by the way annuities are structured. Insurers buy long-term bonds and gilts to fund the income paid out by annuities, and it is the yield on these bonds plus mortality rates (the length of time which you are expected to live) that influence the amount of income paid out.
Long-term bonds are in great demand from pension funds such as Boots, which recently switched all its money into bonds from equities. At the same time the Government, trying to rein back public borrowing, has cut back on the number of gilts in issue. This has resulted in the price of long-term gilts and bonds staying high and their yields remaining low (yield equals the interest paid out by the gilt divided by its price).
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Yields may rise slightly next year if the Government issues more gilts to pay for the war in Afghanistan . But the market expects they will remain at current levels or lower over the long term.
Any short-term improvement in yields is likely to be wiped out by the increase in pensioners' life expectancy. As annuities are designed to pay out a fixed income until death, the longer you are expected to live, the more it costs to buy that income.
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Bayliss says insurers have already absorbed the cost of improved health by using slightly lower quality (and therefore less expensive and higher yielding) bonds for their portfolios. But he says: 'There is a limit to how many times they can do that.'
He adds that those who have already deferred should review their decision. 'I'm not saying "buy now, it's your last opportunity". But if you are one of those people who didn't like what they saw in 1997 and 1998, you do need to review your decision.'
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Although the Government is coming under pressure from the pensions industry, consumers and back benchers to reform legislation requiring pensioners to buy an annuity with most of their pension fund, the Treasury has resisted, saying that it would lead to a loss of revenue - partly because tax on annuity income would be reduced, and partly because investors would be likely to increase their pension contributions, and therefore the amount paid out in tax relief, once the disincentive of buying an annuity was removed.
In the meantime, the best way to make the most of your pension fund when buying an annuity is to go for an 'open market' option - buy the highest-paying annuity on the market rather than accept the one offered to you by your pension provider.
Published with kind permission of Jill Insley
from the Observer, Sunday November 25, 2001 |
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| Annuity Direct is a trading name of Directly Financial
Limited, independent financial advisers authorised by the Financial
Services Authority. | |
