Record low interest rates have been bad news for those looking to buy an annuity - and with bond yields plummeting it seems annuity rates still have further to fall. But with the likelihood of interest rate rise in the future, will the tables turn for annuity rates? If so, is it worth delaying your annuity purchase?
Figures from William Burrows Annuities show that annuity rates have fallen by 9 per cent over the last three years. As the table below illustrates, in April 2008 interest rates were 5 per cent, long-dated gilt yields were 4.57 per cent and William Burrow's benchmark annuity was paying £6,547. Today interest rates are 0.5 per cent, the gilt yield is 3.88 per cent and the benchmark annuity is £5,943.
| Bank rate | Gilt yield | Annuity | |
| April 2008 | 0.5% | 3.88% | £5,943 |
| April 2011 | 5% | 4.57% | £6,547 |
Source: William Burrows Annuities
Notes: Based on gilt yields as at 27 April 2011. Benchmark annuity based on male aged 65, female aged 60, £100,000 purchase, joint life two-thirds, guaranteed for five years and level payments.
It is likely that annuity rates might fall further still, according to Billy Burrows of William Burrows Annuities: "During April, yields have fallen significantly; however, annuity rates have held up. This means that when annuity companies review their rates after the May Bank holiday, they may decide to cut their rates unless yields bounce back."
But what if interest rates rise in the near future - will this push up gilt yields and annuity rates in turn? And, if so, should you delay an annuity purchase in order to benefit from any increase?
Mr Burrows says that while the underlying interest rates is expected to rise, it is unlikely that the full benefit will be passed on to customers given factors such as life expectancy and gender neutral annuity pricing. "Investors who delay their annuity purchase in the hope that they will get a higher income are generally disappointed. Timing an annuity purchase is a complex thing because not only are annuity rates moving, but fund values can also be volatile," he adds.
Laith Khalaf of Hargreaves Lansdown adds that even if you can get a better rate by delaying your purchase this might not make up for the income you have missed out on in the meantime. "You could hedge your bets by annuitising in stages, or wealthier investors willing to take investment risk might consider a drawdown plan to provide them with a flexible level of income. But the golden rule is to shop around for the best annuity rate." For a table of best buy annuity rates see http://www.ft.com/personal-finance/annuity-table
