Hargreaves Lansdown says gilt rate rise means delaying annuity purchase may make sense but other factors still important

26th June 2013

With the 15 year gilt yield rising from 2.2% on 2 May to 3.0% (as of 26th June) Hargreaves Lansdown says that annuity rates should follow and become more generous but the firm has emphasised that it isn’t an exact correlation i.e. annuity rates usually track gilt rates over time but they don’t respond immediately. 

Discussing the gilt yield picture, Hargreaves Landown head of pension research Tom McPhail says: “It is unrealistic to expect a sudden short term jump in Gilt yields to feed through immediately into higher annuity rates. However if this new pricing environment for gilts persists then an annuity rate increase is on the cards.

“It is important to bear in mind that annuity pricing does involve more than simply interest rates. Factors such changing life expectancy, regulatory controls, underwriting trends, insurers’ new business requirements all play a part in pricing decisions. It is also worth noting that there have been a number of annuity rate increases already in recent days (see table below). Annuity companies are moving their rates upwards, they’re just not in a hurry to do so.”

It may have a bearing on a retiree’s decision to delay annuitising, but there are a host of other factors to take into account.

“If you choose to delay you’ll have to keep your pension fund money invested somewhere and assuming it is a short term ‘treading water’ strategy that means holding it in cash, which in turn means losing money in real terms. This is not a ‘no loss’ option. You have to weigh up whether any short term loss of real value is going to be offset by higher rates and the longer you have to wait, the higher rates will have to go to compensate. This annuity delay calculator may help http://www.hl.co.uk/pensions/annuities/annuity-delay-calculator.

“If you need income in the short term and just want to delay buying an annuity then the answer is to use drawdown but this involves more risk as you are drawing income from an investment fund; if the markets drop you could suffer a lot of damage to your retirement pot quite rapidly.”

McPhail also suggests mix and match may allow a phased approach.

“For many people a simple and sensible answer is to mix and match; buy some annuity with some of your pension fund today, and if more income is needed then either use the tax free lump sum or use the drawdown rules. If further income isn’t needed today, then it is fine to use just a portion of your pension fund to buy some annuity and leave the rest invested for now. This ‘phased’ approach minimises the risk of getting the timing wrong.”

16 thoughts on “Hargreaves Lansdown says gilt rate rise means delaying annuity purchase may make sense but other factors still important”

  1. Drf says:

    There seems to still be a strange dichotomy running through today’s blog article. When a statement is made: “The penchant for revisions and improvements that is running through the national accounts has reached the balance of payments figures.”, but this is not recognised (overtly) to include also reaching the official inflation numbers and all other official numbers, as similar to the propaganda “Tractor production this year has exceeded all forecasts and all expectations”, that seems a bit worrying? Once a propaganda policy is set it is applied to all official numbers. Of course at the base of it we have the old now conveniently forgotten claim that a much-weakened Pound Sterling will make exports rise to the roof! Well of course it did not as we can now see, but the reason it did not is because of other political causes, namely continued and increased excessive taxation.

    “The UK inflation picture is complex.” I do not think it is in fact complex at all – it is just totally manipulated and fraudulent. One either wants to tell the truth, or an evil person or entity wants to lie and misrepresent instead, to avoid the truth.

    1. therrawbuzzin says:

      ” but the reason it did not is because of other political causes, namely continued and increased excessive taxation.”
      ur views about the rates of tax being excessive may differ, but you reiterate my point about the ability of fiscal control to mitigate/negate monetary policy very well.

    2. Anonymous says:

      Hi Drf

      The point I was making with regards to inflation was that there are international disinflationary pressures around. For example the oil price and the lagged effect of the rise of the £. Of course the latter has faded as it has lost about ten cents from it speak. But overall even with this UK CPI is not much below its target and RPI is on it.

      It would take quite something to push us down to the rate of inflation seen in the Euro area (sadly…).

  2. Anonymous says:

    Speaking to people up here in Scotland the driver for change is not realy about a desire to break away from England or rUK but to escape from Westminster. So you are right to question the benefit that Gordon Brown brings to the Better Together campaign. I say Better Together campaign but it really does seem to have been a worse apart campaign.
    We end up here….a situation where many no longer trust or belived much that comes out from Westminster politicians or the Westminster aparatus, such as the ONS.
    After the vote, there may be many in the UK or even rUK who would want to also seek some “independence” from Westminster and all that it has become. I hope our professional politicians and their party machines are proud of what they have done to our economy and our democracy.,

    1. forbin says:

      ladydog, I think most of England , yet alone here is sunny Surrey , would like to escape from Westminster choking grasp!

      Its not just a case of a 9% pay rise , I’d rather have my MPs paid enough to refuse bribes ( I’m looking at you , Bankers ) but what am I paying them for ?

      Lies ? apparently so , garbage economic figures ? yup , and who makes most of the laws now ? Europe!

      I’d cut them back to 150 , afterall I heard somewhere 75% of all new laws are made in Europe….. so we dont need so many of ’em do we?


      1. Londoner says:

        yep. 150 seems even too much. How many lying, self-serving bankster puppets do you need to run a country anyway.

    2. Anonymous says:

      Yes! We should have a joint campaign to kick Westminster / The City out of the UK. This is what people want. Scots have no problem with Brummies.

    3. Anonymous says:

      Hi Ladydog

      I would just like to say that I reiterate your sentiments pretty much and if the Walkit.com site is correct I am a 2.6 mile walk from the Houses of Parliament right now!

      I hope the Independence result will shake things up but fear that the Westminster establishment will just return to their default position afterwards for us down south anyway.

  3. forbin says:

    they do not appear to know what defaktion means.

    I dont either , Shaun, I think you meant disinflation


    1. Anonymous says:

      Ooops! Apologies and corrected now….

  4. dannyboy says:

    Hi Shaun. Surely this is generally expected by any reasonable onlooker, as Einstein’s definition of insanity seems of relevance here. Put simply, without radically rethinking the uk economy the big picture won’t change, the changes required are too great for tinkering to succeed. Now, as to *how* to reform it, that must be where the interesting discussion is, isn’t it…? I don’t see much leadership on this from Westminster.

    1. Critic Al Rick says:

      If a leader was to promote the changes required (s)he’d be assassinated forthwith by some Parasite faction (rich, poor or intermediate) whichever one managed to get there first.

  5. Andy Zarse says:

    Deflation (AKA disinflation) is highly unlikely I suspect if the YES folk win and the £ falls by the expected 5-10% range.
    We’ll be more likely seeing an early interest rate rise to steady the ship IMO, but whatever happens the referendum has certainly added some spicy uncertainties.

  6. forbin says:

    anteos , they’ll re-adjust the figures

    you know make coke and prostitution more expensive

    or allow rail fares to rise

    If USA does more QE then we will ,

    god help us when the USA wants to do something that’s bad for the rUK , then we’ll see who has no shorts on!!


  7. Anonymous says:

    If Yes win and GBP drops further as you say short-term inflation is on the cards. Once that is flushed through it could be deflation after this though.

    My guess is if we go down this path they will “look through” inflation until it’s flushed out.

    ps loved Carney predicting wage rises “in a year”. How many BoE predictions use this pattern? Guess what he’ll say in a year?!

  8. Anonymous says:

    Hi Progrock

    Mark Carney kicked the wage rise position into next year and then suggested it would take 3 years to get back to a higher level.

    “However, the MPC expects it will take the better part of three years for this to happen.”

    “Specifically, the Bank’s latest forecast expects real wage growth to resume around the middle of next year and then to accelerate as the unemployment rate continues to fall to around 5½% over the next three years.”

    I think that the TUC will be a little less willing next year to fall for a line in soft-soaping from an ex-Goldman Sachs salesman

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