Expert: Paul Speight, Head of Business Development, Canada Life Facilitator: Roderic Rennison, Director, Catalyst Partners
Headlines:
- Life expectancy changes reduce annuity pricing longevity - Falling life expectancy due to obesity and declining birth rates is causing actuarial reductions in annuity pricing. Increased early retirement has also strained the workforce. This results in annuity providers factoring in shorter life expectancy.
- Quantitative easing suppression ending lifts gilt yields - Gilt yields directly drive annuity rates. The end of QE money printing by the Bank of England has allowed gilt yields to rise back to normal market levels, increasing annuity rates.
- High expected UK debt issuance maintains gilt yields - Large required government borrowing over the next 5 years, estimated at £160-220 billion, will likely keep gilt yields and thus annuity rates elevated as debt must be absorbed.
Discussion:
The presentation discusses the current state of annuity rates in the UK, which have risen significantly in the past year to historically high levels around 7-8% for a 65-year-old. This is driven by several factors:
Falling life expectancy due to obesity, declining birth rates, and increased early retirement during the pandemic placing strain on the workforce. This results in annuity providers pricing in shorter life expectancy.
The end of quantitative easing (QE) by the Bank of England, which previously suppressed government bond yields. Rising gilt yields directly increase annuity rates.
Large required issuance of UK government debt over the next 5 years, estimated at £160-220 billion. This results from unwinding the QE position and continued high borrowing needs. Higher issuance will likely keep gilt yields and thus annuity rates elevated.
Given rates are now attractive, annuities should likely take more prominence in retirement planning. However, there is reluctance among advisory firms since annuitisation removes assets and ongoing revenue streams. Clients are also biased against annuities due to loss aversion and wanting to leave an inheritance. Strategies suggested to make annuities more appealing includes:
- Buying earlier at 60-65 when rates are above withdrawal rates, since deferring loses substantial income that takes many years to recover. Guaranteed periods also return capital if dying early.
- Partially annuitize only necessary income rather than fully, keeping the rest in drawdown for flexibility and inflation protection. Use it for clients with low risk tolerance who have suffered losses in drawdown, since annuity rates have grown faster than losses.
Key takeaways:
- Research potential annuity products and rates for clients aged 60-70 and compare to current drawdown strategies
- For clients already in drawdown, analyse if losses have outpaced annuity rate gains, making conversion advantageous
- Evaluate incorporating partial annuitisation into retirement plans to secure portion of income but retain assets in drawdown
- Discuss with clients how guaranteed periods can provide capital return certainty and inheritance value in annuities
- Consider rewriting retirement investment policies to take into account current elevated annuity environment
- Investigate incorporating annuities earlier at age 60-65 given high rates relative to withdrawal rates
- Monitor Bank of England quantitative easing plans and gilt yield movements as a leading indicator of annuity rate direction
