Annuity rates move up in February
There has finally been some good news for retirees with annuity rates rising over the past month.
Let's imagine you were 60 years old on 1st March and you decided to convert your £100,000 pension pot into an annuity on that day.
Assuming you were in good health and didn't have any 'lifestyle' issues such as smoking, your best bet would have been to purchase a 'level' annuity from Aviva, the insurance giant. Aviva would then have promised to pay you £5,103.72 a year until you died. (As it's a level annuity, your annual income from the annuity wouldn't rise.)
Now an annual income of just over £5,000 may not seem that great, but at least it's 3% higher than what you would have received from the top annuity on 1st February.
In other parts of the annuity market, we've seen rises between 0% and 3% over the month.
All about gilts
Annuity rates rose because gilt yields also rose during January and early February. Indeed yields on 10-year gilts reached a peak of 2.21% on 13th February. (You can read about how gilts work in Why gilts matter.)
Annuity rates are closely linked to gilt yields because annuity providers buy gilts to give them the guaranteed income that they need. The providers then use that income to pay out annuities to pensioners.
Sadly though, gilt yields have fallen back since mid-February. As I write the yield on 10-year gilts is now 2.01%. If yields stay unchanged for the next week or so, you can expect to see lower annuity rates coming through by 1st April. That's bad news for anyone who is on the verge of retiring and is considering using their pension pot to buy an annuity.
Sadly, I think gilt yields are going to stay low for the rest of this year and probably well into 2014 as well.
What you can do
If you're retiring soon and you have a pension pot that you want to convert into an income, it's essential that you get the most value from your pension savings.
Firstly, I'd suggest that you consider taking income drawdown rather than buying an annuity. You can read more about drawdown in What's wrong with income drawdown? Income drawdown isn't appropriate for everyone, but it's well worth thinking about if your pot is worth £100,000 or more.
If you decide to go down the annuity route, it's essential that you shop around and get the highest-paying annuity on the market. You should also make sure that you declare all your health or lifestyle problems. So if you're a smoker, make sure you declare that fact, as you'll get a bigger income as a result. Similarly, if you're suffering from any health condition, make sure you disclose that before you buy your annuity.
Converting a pension pot into an income is a really important financial decision, so it's probably a good idea to get advice. All of the following firms have decent reputations: Key Retirement Solutions, Annuity Direct and Hargreaves Lansdown.