Annuity rates, which are based on gilt yields, have long been in decline as low interest has chipped away at returns. Brexit delivered a further blow, to the extent that on 11th August, the 15 year gilt yield fell to an all time low of 0.9%. The great virtue of purchased annuities as a retirement option has always been their certainty. You bought your annuity at a certain rate and that income was then guaranteed until you died. However, annuities are now becoming unattractive to many people with the disadvantage of very low levels of income far outweighing the benefit of income certainty. No less a person than the chief economist at the Bank of England has suggested that investing in property may now be a better option than investing in pension plans, notwithstanding the generous tax perks.
Landlords in UK can expect to receive up to 9% per year income on their investments whereas over 55s buying an annuity can expect to receive less than 2.5% depending on age and health. The recent pension freedoms have made drawdown arrangements flexible and easy for anyone with a pension fund. Too easy probably. In the year since the freedoms were introduced, payouts have totalled £8.2 billion. There seems little doubt that the widely predicted scenario of pensioners using up all of their funds and then falling back on the state, will be realised sooner rather than later.
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