If you want to monitor the trend for annuities just look at the yield gilts. It is simple, if yields rise so do annuities and vice versa.
Annuity companies invest the money from annuity purchases in a wide range of corporate bonds and property but the gilt yield remains a reliable benchmark.
As I often say, there is a useful rule of thumb; ‘over the longer term, for every 100 basis points change in yields, (e.g. 2% to 3%) annuity income changes by between 8 and 10%’
I refer to the 15-year yield quoted in the FT under the heading “UK FTSE ACTUARIES INDICES” (see image) and the problem with annuity rates at the moment is yields are stuck in a range either side of 1.5%. This means that there has been very little significant change in annuity rates for some time.
I now run a weekly chart comparing my benchmark annuity (£ 100,000 joint life 2/3rds, ages 65 and 60 and level payments) and the 15-year gilt yield and as you can see all is relatively quiet on the annuity front.
My personal view is that annuities are unattractive at these levels for people under the age of 65 and in good health but annuities are attractive to older investors who want to lock into guaranteed income and de-risk. To be clear – there is nothing wrong with the annuity concept, it is just that the underlying interest rate is so low at the moment.
Looking ahead, the question is when will yields start rising and at what level will they be seen as offering good value and start replacing drawdown for those who want income from their pension pot?