Crunch drives annuities to 5-year high
Retiring investors should be able to enjoy greater income when they cash in their pension pot for an annuity because insurers are now able to compete even more fiercely for the top price spots driving up annuity rates to a five year high.
Nigel Callaghan of Hargreaves Lansdown, an independent financial adviser, says: 'Individuals retiring now have the best annuity rates available for years on offer to them - and this is a direct result of the credit crunch.'
According to Hargreaves Lansdown, today's typical yield for a 65 year male is now 7.66% per annum almost 11% higher than the yield in March 2006 of 6.92%.
Already in 2008 there have been around 40 rate movements, averaging more than two a week in the last month alone, there have been 17 rate changes, with 88% of them increasing.
This is a fierce acceleration from 2007 when there was a total of 101 rate movements throughout the entire year. In 2008, Hargreaves Lansdown expects the amount of rate changes to easily surpass last year's.
Annuity rates have primarily been forced 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.
Since the credit crunch first emerged late last summer, the yields on corporate bonds have increased significantly as the value of corporate bonds has sharply fallen.
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.
Presently the best deal in the market, for a 65 year old man or woman is from Aegon Scottish Equitable, which offers an annual annuity of £7,676 and £7,074 respectively for a £100,000 pension pot. In terms of the 65 year old male the current deal is up from £7,150 a year ago representing an 8% increase.
But in regards to the future outlook for annuity rates there is a mixed picture. Life expectancy is still increasing and many corporate bond managers are arguing that the markets have already priced in the vast majority of the possible bad news and each of these factors could drive rates down.
But if the economy does nose dive, companies and individuals will find it more difficult to borrow and inflation fears could rise again, forcing rates even higher still.