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What can the UK learn from US annuities?

Thinking about the future? If so, you’ll probably have made plans for your retirement. You may be part of a workplace pension plan, set aside a little money each month in a savings fund or, to try and get the most from your money when you’re ready to leave work, have an annuity.

Although broadly the same, there are a few subtle differences between annuities in different countries. In the US, for example, there are several different types of annuity someone can take out in order to guarantee themselves a certain amount of money each year post-retirement.

The American way

US annuities come in a variety of forms which include:

  • Immediate annuities – where investments are received straight away after investing
  • Deferred annuities – where payments start at a fixed date in the future
  • Fixed-rate annuities – where the rate of payment doesn’t change
  • Variable annuities – the rate changes according to market conditions while you can invest your money in different portfolios

This choice may give people a headache when choosing the package they feel is right for their needs. However, it proves that people stateside are able to get more value for money, although the picture isn’t quite as rosy as it may appear.

Trouble on both sides of the Atlantic

In the US, annuity rates have dropped significantly in recent years as a result of the recent banking crisis, but rising life expectancy and reluctance on the part of some annuity providers to offer higher rates have also played their part. However, things are even worse in the UK.

There, the average annuity rate is even lower. Also, a gender equality ruling from the European Union at the end of 2012 saw rates for men drop more sharply as they received higher rates beforehand due to shorter lifespans. Despite that, a lack of flexibility and choice in the annuity market could explain why rates in the US are still more favorable.

A spokesperson from My Pension Expert had this to say on the issue:

“Annuities rates have fallen in the UK and the US in recent years due to the current economic climate. The banking crisis has led to record low interest rate on both sides of the Atlantic which is having a knock on effect on current annuity rates.

“This is because annuity providers use secure types of financial products such as corporate bonds and government bonds to provide the income for their annuity book as these types of investment are usually safe and low risk”, he added.

“When government and corporate bonds are introduced to the market they have to offer a competitive rate of interest to attract investment, but due to the lack of an attractive alternative form bank interest rates the yield offered have fallen proportionately.

“The economic crisis is having a harder impact on UK rates as the annuity rate offered for a 65 Year old male is 5.75% compared to 6.8% in the US. This could be as a result of UK qualitative easing which is putting additional downward pressure on UK government bond yields”, he concluded.

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