Annuities - impact of recent rate rises

R

Rasputin

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As interest rates are starting to rise again, at what point will annuities start to become attractive again, and how far away are we ?

I had just assumed I would be going down the ARF route when the time came, but the interest rate landscape might well be very different over the next 5 years now. Is there a rule of thumb where rates would need to get to where an annuity would make more sense than going with the fees and risks associated with an ARF ?
 
There are swings and roundabouts here.

Annuities prices are likely to fall as interest rates are rising. But why are interest rates rising? Because of greater expected inflation! So you pay less but probably get less too.

In the US yields on inflation-protected securities have risen which suggests that an index-linked annuity should get cheaper. See chart below.

But the inflation and interest rate dynamics are different in Europe, and I'm not sure how the walk from wholesale to retail pricing is done here.

 
moneymakeover said:
Why not choose a mix of annuity and ARF
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Definitely an option. That was kind of the point of the question, at some point, for me anyway, the guaranteed income you can get with an annuity would become very attractive as you take out all the uncertainty, administration and ongoing costs of an ARF. Most of us have a particular salary in mind where we would feel comfortable to retire with, and taking risks to potentially get more doesn't appeal very much.

If annuity rates were good enough, that would be my preference, and I would only go the ARF route if they weren't
 
moneymakeover said:
Why not choose a mix of annuity and ARF
Click to expand...
It depends on the size of your pension pot, but I would use the lump sum to put about 10% in a normal annuity and another 10% in an index-linked annuity.


It's kind of insurance against some combination of high inflation and a prolonged fall in equity prices.
 
I guess individual circumstances vary greatly because most people have other sources of money in retirement which are similar to an annuity in their 'fixedness', even if it's just the state pension. I'm 10 years from retirement (hopefully) but plan to arrive there with Irish state pension, UK state pension, small UK public sector pension and then same for my wife. So there is little sense that I can see in trying to fix the income via an annuity from the pension fund I'm investing in, which will hopefully get to about €500k when I retire. I am less exposed to variations from an ARF in terms of my total income.
 
Any further views on the much increased annuity rates over the last few months?
 
I just got an annuity quote for a 68 year old man with spouse 4 years younger (100% reversion) and 10 year guarantee period. Rate was 4.423% level no indexation.

To match this an ARF would need to be making around 6% or 6.5%pa (allowing for charges) just to keep up.

If the ARF averages less than this, then, if the income is kept at the level available from the annuity, the ARF fund would begin to deplete and there would be a risk the fund could bomb out.

This, in essence, is why annuities should be the default for many retirees. It’s actually very difficult for an ARF to keep up the same level of guaranteed income and this is especially true for people who live longer than the average. Which is of course the primary benefit of an annuity.
 
Annuity rates are on a 14 year high so they may improve further given interest rates are going further north.
 
Marc said:
I just got an annuity quote for a 68 year old man with spouse 4 years younger (100% reversion) and 10 year guarantee period. Rate was 4.423% level no indexation.
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Could I just ask what you mean by the 10 year guarantee, I thought an annuity was income for life - does this mean after 10 years when he is 78, all the money is gone or you have to with the new rate at that time, which could be much worse ?
 
Annuities are for life but you can can elect to have a guaranteed period of 0 , 5 or 10 years.

If you died in year 5 with a zero guaranteed period - the annuity payment ends year5.

If you died in year 5 with a 10 year guaranteed period - the annuity would be paid for another 5 years.

A 10 year guarantee reduces the annuity rate.

Gerard

www.pensionannuity.ie
 
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So annuities with guaranteed periods are not for life? Are for life annuities ever transferable to spouse on death?
 
David_Dublin said:
So annuities with guaranteed periods are not for life? Are for life annuities ever transferable to spouse on death?
Click to expand...
Might be worth studying?

Benefits payable on retirement - pensionsauthority

On retirement from a private pension arrangement you will have a number of options available to you. The decisions you take at this point will have a significant bearing on your financial security and that of your dependants. You should consider taking advice when deciding upon your retirement...
www.pensionsauthority.ie
 
@David_Dublin

All annuities are for the life of the person purchasing them.

At outset, you can elect to do a single (first) life annuity or a joint (second) life annuity.

If you elected for a single life annuity with a guaranteed period of 10 years, and you died in year 5, the annuity would be paid to your spouse for another 5 years.

If you elected for a joint life annuity at outset, and you died in year 5, the annuity would then be payable for your spouses lifetime as well.

When choosing this option you can also select a 'reversion rate' of (say) 50% or 100%, meaning the spouse would receive 50% or 100% of the annuity that that the first life was receiving.

'Overlap' is also an option - on a joint-life annuity with guaranteed period of 10 years and reversion rate of (say) 50% , you die in year 5, so your annuity payment and your spouses annuity payment (50% of your annuity) are both paid, thus 'overlapping' for 5 years.

All options cost and reduce the annuity rate.


Gerard

www.pensionannuity.ie
 
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I presume most ARF investments are a mix of stocks/bonds/cash. Would it make sense I wonder to replace the cash portion with an annuity as it provides some stability with a much better return than cash?
 
@Red Helmet

Yes, a lot of ARFs are invested in Mixed Asset or Multi Asset Funds and you could have anything from circa 0% - 10% Cash in some of those at any one time, depending on your risk profile.

Nothing to stop anyone buying a mix of Annuity & ARF at outset or some years into an ARF.

Gerard

www.pensionannuity.ie
 
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