It is possible they could fall lower, but I believe yields and annuities will slowly bounce back – although it may be a long time before they return to their position before the referendum.
Even the most ardent fan of lifetime annuities must agree the case for purchasing lifetime annuities at these levels is not very strong. Not only have the rates changed for the worse, but the optimum time to purchase an annuity has also changed.
While there is probably no specific age, or time, that can be regarded as the optimum, most experts agree the best time to purchase an annuity is when guaranteed income becomes an important priority.
The benefits of mortality cross subsidy increase with age and this means the optimum time to purchase an annuity is probably during a person's late 60s or early 70s, depending on health.
This does not mean annuity purchase should not be considered at early ages, especially for those who qualify for an enhanced annuity or where a guaranteed income is the priority. However, advisers may not want to commit clients to a lifetime of low income if they are relatively young and generally in good health.
It is important to understand how the relative value of annuities changes with age because there are advantages in purchasing annuities (in whole or part) as a client gets older and the benefits from mortality cross subsidy increases.
An annuity is a type of insurance policy and the income for life promise is made possible because they are based on the principle of mortality cross subsidy: those who die before their expected life expectancy produce a notional profit that is used to subsidise the payments of those who live longer than expected.
Drawdown is an investment proposition, not a type of insurance policy, so there is no mortality cross subsidy. Unlike an annuity where the capital is exchanged for income, the money in a drawdown plan remains in the control of the client.
Mortality drag is the term used to explain how the absence of mortality cross subsidy has a negative impact on a drawdown plan where the aim to maintain the annuity purchasing power.
No one option can be described as being the right answer, but it seems fixed-term income plans do have some advantages over lifetime annuities – and this comes from someone who has been critical about them in the past.
Perhaps the biggest advantage is the option to secure a level of income for a set period and then having the potential to review the options depending on market conditions and circumstances. Maybe lifetime annuity rates will have increased.
