Any questions: Finance

Thursday, June 30, 2011

Any questions: Finance

With interest rates so low should I wait for them to go up before buying an annuity?

In normal market conditions, the older you are the higher the annuity rates you should secure - and the higher the annuity rate the more income you will receive from your pension pot. However, the trend for annuity rates has been downward for many years and those who have waited have often been disappointed. There are three reasons for the general fall in annuity rates:

1) Long-term interest rates have fallen
2) Life expectancy has generally increased
3) Insurance companies now offer higher rates to some people e.g. those with health conditions or smokers. The corollary of this is those healthier lives are left with lower rates.

Looking at current interest rates, we know they are at a historic low and have been for more than two years. The next change to interest rates is almost certainly a rise, however when and by much, and what affect this will have on annuity rates, is unknown.

The consensus is that rates will not change significantly over the next couple of years unless inflation continues to be a problem, in which case they may rise sharply. Against this, two new European laws could force annuity rates downward. Firstly, insurance companies are now required to have more capital reserves and the cost of doing so is likely to filter through to lower annuity rates. And, from the end of 2012 insurance companies will no longer be able to price annuities based on gender, a move that is likely to mean a reduction in annuity rates for males.

Looking at all these various factors combined, if you wait, you risk your annuity income being lower not higher than if you bought now. If you delay buying an annuity you also miss out on the income that would be paid if you bought one now. In my view, those people who buy annuities normally need a certainty of income. Under these circumstances, certainty means buying an annuity now and not waiting.

I'm planning to buy an annuity when I retire and move abroad in the near future. What's the best way of doing this - does it make a difference if I choose my annuity while still in the UK or should I wait until I've moved to Spain?

Choosing a suitable annuity will enable you to obtain the best income rate from your pension fund and selecting the right annuity provider could mean thousands of pounds more income over the course of retirement. Shopping around for an annuity should be done before you leave the UK, as the income rate you enjoy could be higher.

The annuity rate offered is based on two main factors: long-term interest rates and your life expectancy. Residents of some UK postcodes enjoy higher annuity incomes as life expectancy is lower in some regions than others. These "postcode" annuity rates are not offered to non-UK residents. If your life expectancy is lower than average due to a health condition or because you smoke, your annuity rate should be higher. However, annuity companies that offer enhanced annuity rates will normally only accept medical information from UK doctors. This makes arranging an enhanced annuity abroad problematic. Over 40 per cent of annuities purchased through annuities in April 2011 enjoyed an enhanced annuity rate. Furthermore, there are various items of paperwork and documents such as your passport or birth certifi cate that have to be trusted to a postal service.

Overseas postal services may not be as reliable or as quick as in the UK and this is another reason it is normally better to arrange your annuity before you leave. Your annuity will be based in the UK and paid in Sterling, then converted to the appropriate currency. Many expats retain UK bank accounts to receive payments then have these transferred to a local based bank. There are currency exchange rate risks here and one option is to fix the currency rate in advance using a specialist currency service.

Regardless of when or how you shop around for an annuity, it is far easier using a specialist annuity broker than trying to do it yourself and they will help you check whether you are entitled to an enhanced rate.


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