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Hargreaves Lansdown predicts falling annuity rates
Hargreaves Lansdown predicts falling annuity rates
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Annuity rates set for downward spiral

24 October 2008

Annuity rate will fall significantly over the next twelve months, according to Hargreaves Lansdown.

Ordinarily, there is a fairly close correlation between bond yields and annuity rates, but as annuity providers continue to hold back from passing on the full extent of rising yields over recent months, annuity rates have been decoupling from bond markets.

Tom McPhail, head of pensions research at Hargreaves Lansdown, says, ‘With economic indicators now pointing downwards, we expect annuity rates to fall off quite sharply over the next year. The benchmark rate for a 65-year-old male is currently 7.7 per cent, we think that there is a strong argument for rates dropping well below seven per cent over the next 12 months.’

Along with gilts, corporate bonds form the underlying investments used to pay annuities. With the credit market seizing up, the yields on corporate bonds have spiralled to unprecedented levels – relative to gilts – and this, in turn, has allowed insurers to increase annuity rates.

Government measures to inject liquidity into the market and kick-start lending again will hopefully bring interest rates down. When the market does start functioning again, bond prices could jump as yields drop back. This is likely to bring downward pressure to bear on the annuity rates.

McPhail adds, ‘Looking further ahead, the impact of falls in sterling and escalating government debt could reintroduce upward pressure on rates. This is much less certain though and in the short term we feel that the pressures are universally downward.’

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