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
Created on: 11-May-10 15:53
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