Page last updated at 05:16 GMT, Wednesday, 30 April 2008 06:16 UK

Credit crunch benefits retirees

Money Talk
By Nigel Callaghan
Hargreaves Lansdown

Nigel Callaghan

Retiring investors looking to buy an annuity could be one of the very few groups to significantly benefit from the fall out of the credit crunch.

This has caused a widespread lack of confidence in governments, companies and world stock markets.

One effect has been that the income obtainable from company loans - corporate bonds - has become substantially bigger for investors.

It is these investments that insurance companies largely use to pay annuities.

Today's annuity rates are now at a five-year-high.

High point

At some point, a person will want to convert their personal pension savings into an income stream and most will do so by choosing an annuity that will pay an agreed amount of money for the rest of their life.

As the income - also known as the yield - from corporate bonds has become much higher, the corresponding annuity rates that are offered have soared.

A 65 year old man can purchase an annuity providing a 7.66% annual return on his pension fund.

This is almost 11% more than what could have been bought just two years ago.

A 65 year old woman will get a 7.18% yearly return.

This is likely to affect large numbers of people as there some 464,000 annuities were bought in 2007.

Frenzied

Rising investment returns have sparked a price battle in the most competitive parts of the annuity market.

This rate war is seemingly becoming even more frenzied

Insurance companies know that the best priced annuity is likely to attract the largest chunk of business from people who shop around.

The companies are desperate to grab their share of the market, and rate changes are occurring at unprecedented levels.

There have already been 40 annuity rate changes this year - that's almost two every week.

This rate war is seemingly becoming even more frenzied.

There have been 17 rate changes in the last month alone, 15 of them upwards.

For ever

The important point to note is that the annuity rate you buy today will remain payable at that level for the rest of your life, no matter how long that is.

It will not matter if subsequent annuity rates fall in the coming months; you are locked into the rate forever.

Given that the average 65 year old man is likely to live until almost his 86th birthday, and a 65 year old woman until she's over 88, that is a pretty good return.

An annuity never runs out; it will keep on paying, whilst you live.

No other investment will guarantee to do this.

This provides a lot of peace of mind when you consider that there is a 42% chance of a 65 year old living until his 90th birthday and a one-in-five probability of seeing his 95th birthday.

Longevity

But for two main reasons this increase in the return that annuities are currently offering may not continue.

This will typically tend to have a knock on effect on lowering annuity rates

Firstly, the prices of corporate bonds are at historic low levels.

The financial markets have already priced an awful lot of further bad news into their price, thus pushing up the income stream for corporate bond investors.

There are many commentators who think that corporate bond prices are now more likely to rise, which in turn will cause their yield to fall.

This will typically tend to have a knock on effect on lowering annuity rates.

However, if inflation does rise, this could have the opposite effect.

Secondly, we continue to live longer.

Life expectancy has been increasing rapidly in the UK for a number of years and this trend seems to be set to continue.

Insurers are taking account of the fact that annuity payments will have to be paid out for a number of additional years - so there is a strong downward pressure on annuity rates in the long term.

Buying an annuity is a once-off decision and whilst there are no guarantees that rates have peaked, lots of retiring investors are deciding that now is the time they want to buy their annuity.

They largely have the impact of the credit crunch to thank for this.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.



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