Annuities look set to plunge further, after increased demand for gilts has pushed yields to record low.
Gilts – sovereign debt issued by the government – are traditionally seen as a safe haven asset in times of market turbulence. Although the markets have made a modest recovery this afternoon, an 8% fall in the FTSE100 in early trading has led to increased demand for these fixed income assets. This pushed up priced of 10-year and 15-year gilts - as these investments pay a fixed income this further depressed the yield.
Tom McPhail, a leading pension expert with Hargreaves Lansdown said this fall is likely to mean a further dent in annuity rates. Insurers use gilts to fund these long-term savings products, which pay a guaranteed income for life.
He said: “Investors planning to buy an annuity should get their skates on. If these numbers feed through into annuity rates than I’d expect to see them fall.”
Typically annuity rates are guaranteed for two to four weeks. This means an investor in the process of buying an annuity should not be disadvantaged by this latest market turmoil.
Over the past year declining gilt yields – coupled with a fall in annuity sales, and increased longevity – have helped to push annuity rates downwards. A 65-year old today is getting a lower rate than a 60-year old would just six months ago.
Annuity Market in Unchartered Territory
McPhail added that this latest fall in gilt yields “pushed the market into unchartered territory”. He added: “It’s hard to predict whether they will fall further or how much lower they might go.”
This fall in gilt yields could also impact some final salary scheme valuations – many of which are already showing deficits. McPhail warned that company’s sponsoring these final salary schemes, and their trustees should brace themselves for unwelcome news when it comes to the next scheme valuations.
However, experts cautioned private investors not to alter decisions about their retirement income based on the market reaction to the Brexit vote.
Avoid Short-Term Decisions On Pensions
Far few people buy an annuity today at retirement, thanks to new pension freedom rules, which allow people greater access to their pension funds. As a result many more people now choose to keep their pension funds invested and simply draw an income from them.
Investment experts urged those savings for retirement, or who are using their pension fund to provide an income not to make any knee-jerk reaction to market falls.
Many pointed out that share prices which appeared to be in freefall first thing are now stablilising. In fact by mid-afternoon the FTSE100 was higher than at any point during May and June.
Patrick Connolly, of financial advisers Chase de Vere said: “If you are investing for the long-term you must expect periods when the value of your investments will fall and you must be prepared to ride out these periods. If you’re not willing to do this then you probably shouldn’t be investing in the first place. Trust in diversification. Make sure you have a good spread of assets and investments to buffer your investment portfolio from market falls.”
