Over the last couple of weeks we have seen a number of rate reductions across the board from all major insurers. This begs the question what to do. The obvious thing is to defer and hope rates go back up again. Before deciding on this as a course of action you need to analyse the following:
1. How much lost income will there be during the deferral period and how long will it take to recoup that income. If rates do not increase the answer is typically 20 – 30 years .
2. Where is my fund invested? If the answer is cash then it will not grow very much with current interest rates. If equities then be aware of the downside and upside risks. This decision is about balancing risk and cash flows rather than being a knee jerk gut reaction.
Everyone wants to know will rates rise – my stock answer is that I do not have a crystal ball. However if you look at the two main elements of annuity rates you can draw some conclusions. These are:
1. How long you will live. Every time the actuaries look at life expectancy they conclude we are living longer and that will reduce rates.
2. The level of interest rates. I scan the papers every week for someone forecasting a rise in rates but this does seem some way away.
Also, remeber solvency 2 in 2012 is being presented by insurers as reducing rates by 20% – 30%.
Add all of this together and theoutlook for a rise in rates does not look very positive.
Annuity Direct Website
