Is this a new dawn for annuities?

Is this a new dawn for annuities?

In 1990, a male aged 65 retiring with £100,000 savings could convert it into an annuity (an annual income for life) of £15,500 a year.

But by mid 2003, as falling interest rates and improving longevity hit, the same amount would only buy an income of around £7,000.

However, now interest rates have begun marching back up, rates have improved. According to The Annuity Bureau, the best buy annuity for £100,000 (currently offered by Prudential) has crept back up to £7,531.

Behind the rise is an increase in gilt yields caused by expectations that the US will begin raising interest rates sooner rather than later.

Last week Jobs & Money reported that fixed rate mortgages are being hurriedly re-priced upwards, and the same economic reasons are also pushing up annuities.

Peter Quinton of the Annuity Bureau says: "Insurance companies are playing their cards close to their chests as they are watching each other for market position. I would expect some further increases, possibly from companies such as Canada Life which has yet to move its rate."

But don't get too excited - there's little chance that annuity rates will.....continued below

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Higher yields on gilts help, but improving longevity is now becoming a bigger factor.

The old adage of "shopping around" is nowhere more important than in the field of annuities. An extraordinary number of pensioners take the first offer from the company they saved with, rather than visiting a broker who may find a rate 10-20% higher.

It remains compulsory to buy an annuity by the age of 75 from your personal pension savings, although a recent poll by YouGov found that, given a choice, nearly 60% of 50-64-year-olds would not do so.

Yet another attempt is now being made by MPs to reform the annuity laws through a private members' bill to make the rules more flexible.

Retirees would only have to convert a small amount of their pension fund into an annuity to provide enough income to keep them off state benefits, and then invest the rest in Revenue-approved products.

Having passed its first reading, it will be put forward next week by shadow pensions minister Nigel Waterson as an amendment to the Pensions Bill. Should this fail, the Tories plan to pursue the issue in the House of Lords.

But the government remains vehemently opposed to change. However, pensions minister Malcolm Wicks has indicated that the government is at least considering relaxing the rules which force members of money purchase schemes to buy index-linked annuities. This would reverse one of its earlier proposals that, ironically, would have further complicated the system, by increasing the number of annuities they have to buy to six.