From the blog: Planning for retirement is as important now as it has ever been. With the ageing workforce, interest rate hikes and the changing pension landscape, there are a lot of external factors weighing down on the retirement saving plans of savers.
The retirement of the future is going to look very different to how it does today. So naturally, the question many people have is how much the November 2017 increase in the base rate will alter annuity pay-outs. The short of it: not as much as they would like.
The retirement of the future is going to look very different to how it does today: longer life expectancies means a longer retirement, with many having to re-enter the workforce for financial reasons or because they miss the day-to-day contact with people.
Annuities remain a very efficient method of securing an income for life
So naturally, the question many people have is how much the November 2017 increase in the Bank of England base rate will alter annuity pay-outs. The short of it: not as much as they would like.
This is not the first time the base rate has been at its current level: it was at 0.5 per cent for six years before dropping in August 2016 to 0.25 per cent, and rebounding again last year. If interest rates keep rising from here, the attractiveness of annuities relative to cash and drawdown will increase. But, in reality, this modest increase is unlikely to have a significant effect on annuity rates or the number of people buying annuities.
The main reason for this is that interest rates are not the only factor determining annuity rates. Annuity providers hold government bonds to generate the returns paid on the annuity policy. But yields on these bonds have dropped to record lows since the 2008 financial crisis.
And when the Bank of England further dropped interest rates in August 2016, annuity rates hit rock bottom, leaving them less than desirable with both their returns and their popularity. This led to many savers turning towards income drawdown.
A major reason people prefer drawdown to annuities is that it offers the ultimate in flexible access to their money, what they want and when they want it. With annuities, the ‘deal’ is seen as unfair because they are tied to set monthly payments with no flexibility.
Although income drawdown has become a very popular way for people to access their pension funds, annuities do still remain a very efficient method of securing an income for life.
Pension freedoms might have given people more access to their money, but there is a danger some are drawing too much from their pension pots.
With an annuity, you are offered a retirement for life; no matter how long you live, you are guaranteed an income.
Ensuring people make the right choice between the two options and that there are no surprises is key.
The current interest rate hike has not had much of an impact on annuities; savers should remember, though, to plan long term and ensure they make the right choices.
David Bird is head of proposition development at masterstrust LifeSight
