Annuity returns ready to fall again
According to independent financial adviser group Alexander Forbes, level annuity rates dipped downwards in September, suggesting that the annuity market has reached the end of its long bull run and reverted to the longer term trend of falling rates.
In late April, This is Money reported on how the market turmoil had driven annuities to a recent high.
Level and fixed rate annuities are still broadly at a six year high and are 5% higher than they were at the start of the year – having been one of the few groups to have benefited from the credit crunch.
With £18bn and over 900,000 pension policies up for grabs this year, annuity pricing has seen a frenzy of insurer activity this year – much of it pushing rates to six year highs. However, very recent insurer pricing suggests the market may possibly be on a cusp.
Since the credit crunch first emerged late last summer, the yields on corporate bonds have increased significantly as their value has sharply fallen.
Annuity rates have mainly moved up because of what is going on in the world of corporate bonds, where inflationary fears have sent returns soaring and in turn driven annuity rates up.
The spreads - the difference between the value of a bond and the income it yields - particularly on financial corporate bonds, which comprise about half of the UK sector, have widened massively.
A large amount of the underlying investments that back annuities are corporate bonds and as the yields on these investments have increased insurance companies have been able to dramatically increase their annuity rates.
Other factors such as life expectancy, which is on the rise, and government-bond yields are also big influences on annuity rates and rates have fallen some 70% over the past two decades.
Nigel Callaghan, of Hargreaves Lansdown, another adviser says: 'Predicting future rate movements is next to impossible. However, on the balance of probabilities, rates are more likely to fall as the historic high yields of gilts and corporate bonds reduce.'
'Both long term and short term trends appear to be moving in the direction of further cuts in annuity rates. This involves many uncertainties however. If investors want to hedge their bets they might choose to phase their annuity purchase through a series of transactions, rather than converting their pension fund all in one go. Once an annuity is purchased, the annuity rate is secured for the rest of the investor's life.'
According to Hargreaves Lansdown, there have been 76 rate changes so far this year, where 46 have been upwards while just 18 just gone down.
This is a significant acceleration from 2007 when there was a total of 101 rate movements throughout the entire year.