The question is, will annuity rates improve in the future? Would it be worth deferring annuity purchase, if you can afford to do so, or take income drawdown in the mean time?
Annuity rates are determined by life expectancy and the interest rate from gilts (UK Treasury Bonds). Life expectancy is tending to increase and the yield on 10 year gilts is extremely low (2.38%), which accounts for the low annuity rates.
The yield of 20 year gilts is 3.23%, nearly one percent more than 10 year gilts, and the yield on short term money is around the UK Bank rate of 0.5%. The so-called yield curve is steep, therefore. This means that the market expects future interest rates to be higher than now. That being the case, it is likely that future annuity rates will be higher than now.
A steep yield curve like now is typical of the expansionary phase of the business cycle. As the business cycle matures and inflation kicks in, short term interest rates normally rise and this can have the effect of flattening the yield curve, and eventually making it inverted (long term rates lower than short term rates). An inverted yield curve is often regarded as an indication of recessionary times ahead.
The overall conclusion is that it is likely that annuity rates will improve, and it may well be worth waiting for that if at all possible.
Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.
