AUTUMN 2022

Interest rate rises life annuities

It is not only bank interest rates which are on the up.

The most popular route to drawing an income from a pension fund – flexi-access drawdown – is not the only option and comes with built-in investment risk.

So far 2022 has been a year of rising interest rates in most of the developed world. While the focus has been on increased central bank base rates and their knock-on effects, other interest rates have also been getting higher. The yields on medium– and long-term government bonds (gilts) and corporate bonds, for example, have also increased.

One neglected sector has benefited markedly from the rise in bond yields: annuities. For any given age, the annuity rates that companies offer are largely determined by what they can earn by investing in long–term bonds; as bond yields go up, so do annuity rates, and the change has been greater than expected.

For example, at the end of last year the yield on the 15-year gilt was 1.15% whereas by late July it was almost  2.50%. Take a level annuity rate for a 65-year-old, for instance. By late July, the top rate was around 6.25% compared with 5% at the beginning of the year: an increase in guaranteed income of a quarter. Similar rises apply at other ages, although the greatest impact is at younger ages.

The jump in annuity rates has coincided with a bad first half for many of the world’s investment markets. It is a reminder that the most popular route to drawing an income from a pension fund – flexi-access drawdown – is not the only option and comes with built-in investment risk. An annuity provides certainty, regardless of  investment conditions or how long you live.
To find out your potential income from an annuity please ask us for a personalised illustration.

The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit with your overall attitude to risk and financial circumstances.

In this issue:

What price pension freedom?

Buy-to-let facing headwinds

Automatic enrolment ten years on

Steer clear of the scammers

No-fault divorce: take advice

How much ready cash is enough?

News round up