Annuity Yields Hit Multi-Decade Rock Bottom

[AvidFan]

http://www.thisismoney.co.uk/pensions/article.html?in_article_id=505825&in_page_id=6&ct=5

Pension payouts slump to all-time lows

By Dan Hyde

7 June 2010

New retirees are being hit by the lowest pension payouts ever recorded, leaving them with scant returns on their hard-earned nest eggs.

Sharply falling annuity rates have plunged to their lowest level in more than two decades, with rates for a couple in their 60s sinking below 6%.

This means that retirees taking their pensions today are being forced to accept a smaller income than someone buying an annuity with the same pot just a few months ago.

And the bad news for those approaching retirement is that the situation doesn't look like improving.

Back at the beginning of April, a man aged 65 with a wife aged 60 buying an joint annuity with a £100,000 pension pot would have received £6,080 a year.

Today, he would get £5,860. It means rates have fallen by 3.6% in two months.

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[Timm]

But on the other hand, keeping interest rates low keeps the value of their houses high.

I wonder which one they care about more?

That probably depends on whether they have bought their annuities yet.

[the flying pig]

pah, pensions smenshions.

pwoperdee is all of our pensions nowadays.

[OnlyMe]

But on the other hand, keeping interest rates low keeps the value of their houses high.

I wonder which one they care about more?

That probably depends on whether they have bought their annuities yet.

A few more years of targeting inflation 2 years out and missing it by a country mile and they won't have to worry about the house as they will have to sell it because their pension won't buy them a hill of beans.

Edited June 8, 2010 by OnlyMe

[Even Keel]

Annuities are where a very large chunk of the Government's interest payments go. I believe about a third of government bonds in normal times are bought up by pension and insurance funds for this purpose.

By keeping interest rates low and propping up bond prices, the government is effectively cutting private pensions in order to be able to afford the public sector pay and pensions bill.

[Roseland69]

[Bruce Banner]

Phew, thank God I cashed mine in two years ago and bought an annuity at 7.2%.

ie £7,200 per £100K.

[fluffy666]

But on the other hand, keeping interest rates low keeps the value of their houses high.

I wonder which one they care about more?

That probably depends on whether they have bought their annuities yet.

A week or two ago I noted that 5-year mortgage fixes have hit 4% for the best deals. Which is by any measure insane.

I suppose it's a market response if huge amounts of cash are appearing with no home.. yields get driven to zero, and hence asset prices - eventually the price of absolutely anything - get driven to infinity. The whole financial system works about as well as a child's sandcastle on a beach in a tsunami.

Edited June 8, 2010 by fluffy666

[matroskin]

Phew, thank God I cashed mine in two years ago and bought an annuity at 7.2%.

ie £7,200 per £100K.

Is it index-linked, by any chance?

[AvidFan]

Is it index-linked, by any chance?

7.2% - not likely.

4.2 and I'd believe it was.

[lowrentyieldmakessense(honest!)]

Phew, thank God I cashed mine in two years ago and bought an annuity at 7.2%.

ie £7,200 per £100K.

thanks for illustrating what 7.2% means

[scottbeard]

thanks for illustrating what 7.2% means

To be fair, if you said to most people "You have a pension pot of £97,623.02, annuity rates are 3.67%, what will be your annual pension?" they would run away, rather than multiply the two together.

I remember asking someone in my family "I just tossed three tails with a coin, what is the probability of now tossing a head?"* and they didn't know.

People do recoil from maths (although perhaps less so the people on this site).

* it is of course 50%, so long as the coin is fair.

[aa3]

I believe interest rates are heading lower. There is just no demand on the money, and huge amounts of rich people with lots of money looking for places to put it.

[fluffy666]

To be fair, if you said to most people "You have a pension pot of £97,623.02, annuity rates are 3.67%, what will be your annual pension?" they would run away, rather than multiply the two together.

In that particular example, running away would be the rational response..

'So, I have a life expectancy of 20 years, a pension pot of £100k, and you are going to pay out £4k per year.. what's wrong with this picture?'

[R K]

Peak wivery.

[scottbeard]

Pah, those game makers have no idea how annuities work. It should say "Collect £3.67 each turn for the rest of the game"

[scottbeard]

In that particular example, running away would be the rational response..

'So, I have a life expectancy of 20 years, a pension pot of £100k, and you are going to pay out £4k per year.. what's wrong with this picture?'

People might be more positive towards annuities if they viewed them correctly, i.e. as an insurance product.

If you have £100k and you want to draw it down over exactly 20 years, don't buy an annuity - just withdraw 5k pa from the bank.

But if you want protection against inflation and the risk of you living longer than 20 years (which 50% of people will do if 20 is the average life expectancy) then you could buy an index-linked annuity.

From experience in my job (and in my personal opinion), people underestimate how long they are likely to live and how high inflation in the future might be.

[Bruce Banner]

thanks for illustrating what 7.2% means

Glad to be of assistance. I assumed that most members would probably know how percentages work in relation to annuity purchase, but thought it would be worth clarifying it for the few of you who needed it.