Annuity rates continue to fall
Recent studies have shown that annuity rates have fallen again throughout 2011 to reach their lowest levels for almost 20 years.
The reason for this is twofold: firstly people are simply living longer: therefore as annuity rates are based around average life expectancy, then it follows that increased longevity results in reduced annuity rates.
Secondly, annuity rates are also based upon gilt yields. Currently UK gilt yields are at an all time historic low, with the UK 10 year gilt yield currently at 2.2%. This again has resulted in a reduction in gilt yields.
As an example, a pension fund of £100,000 would have now provides an annuity of £6,300 per annum for a ale age 6 on a single life, level basis. Around 15 years ago, this same £100,000 would have produced an annuity of around £9,000 per annum.
This is the negative news, now for the positive: it is no longer necessary to purchase an annuity in orer to provide an income from a pension fund. Indeed, under the highly tax advantageous QROPS schemes, there is no requirement to purchase an annuity at any stage, even after age 75. This means that it is possible to take income drawdown from a pension i.e. simply withdraw an income from the fund, whilst not having to pass the fund itself over to the annuity provider.
There are two major advantages to this: firstly the flexibility to vary income levels is retained i.e. you do not have to lock into an annuity rate which you cannot subsequently change, and which is at an all time low. Secondly, and perhaps most importantly, the individual retains control of the pension fund, and under a ROPs scheme the whole of the fund can be passed on free of taxation to the policyholder’s family (whereas under a UK scheme this would be subject to a tax charge of 55%)
Therefore whilst the lowering of annuity rates is unfortunate for those who have purchased annuity recently, the good news for those with a U pension who are living abroad is that QROPS schemes now offer a very attractive alternative to having to lock in to low annuity rates.