Gilt yields and annuity rates may rise in the future but investors may have to wait several years for this to happen, so it might not make sense to defer an annuity purchase hoping that rates will get better. In fact, things may get worse before it gets better.
There are other options to a guaranteed annuity but these do carry risks and taking a modest amount of risk may not be a bad thing.
Those approaching retirement are facing the ‘risk paradox’. Put simply, many people think that investing in a guaranteed annuity is the lowest-risk option and, in a sense, because the income is guaranteed not to change, it is risk free. But in the future, there is the risk that the spending power of a level annuity will be eroded by inflation and a pensioner’s circumstances may change.
Therefore investors may have to take some risk with their annuity income in order to end up in a better position. This is a hard message to sell and full of potential dangers, but it is an important message that deserves more debate and analysis.
Finally, in times of so much uncertainty it might make sense not to put all of your eggs in one basket and spread your risk. I call this a portfolio annuity and this can range from a simple combination of guaranteed annuities to a more complex solution, including drawdown.
Billy Burrows is director of Better Retirement
Key points
■ In the longer term all pensioners are faced with a number of unknowns.
■ Investors should have other sources of income or capital to fall back on if the future income from an investment-linked option falls in value.
■ Gilt yields and annuity rates may rise in the future, but investors may have to wait several years for this to happen.
