Hung drawn and quartered for annuities?
Is a hung parliament good for annuity rates? The
answer is not necessarily no, and it may well be fatal for higher rate tax
relief on pension contributions.
Although gilt yields
may in the short term rise as a result of parliamentary uncertainty, this does
not necessarily translate into a rise in annuity rates. As the graph below
shows, over the last three years we have seen a decoupling of annuity rates
from bond yields. Indeed despite slight overnight rises in gilt yields, this
morning we have already been notified by Standard Life that they are cutting
their annuity rates by on average two percent.
With a hung parliament and
capital markets in flux there is doubt about the direction of bond yields and
even more doubt about the extent to which this will filter through to annuity
rates. Those currently considering taking pension benefits should get an
annuity quote NOW. This will be guaranteed for a certain period, which
depending on the insurer could range from 18 days to 45 days. If annuity rates
go up, they can get a requote at higher rates, but if annuity rates tumble they
at least have a window of opportunity in which to effect the transfer of funds
Note of caution: it may not
be possible to transfer funds from pension to annuity provider within the
guarantee period, in which case (possibly lower) annuity rates prevailing on
completion of the transfer will be used. Pension investors can speed matters
along by ordering ‘discharge forms’ from their existing pension provider now.
Whoever
forms the next government (increasingly looking like the Tories) it appears
they are going to need the support of the Lib Dems. One Lib Dem policy that
won’t take too much persuasion to get onto the legislative agenda will be the
abolition of higher rate tax
relief. This would save the
Treasury £5.5 billion a year and any collateral damage to the pension system
could be laid at the Liberal Democrat door. We could be entering the final few
weeks of higher rate tax relief on pension contributions. Higher rate taxpayers
should make their pension contribution for this year well in advance of any
emergency budget.
11 May 2010
