Agreeing in part, Vince Smith-Hughes, director of specialist business development at M&G Wealth, says it is possible rates could go higher, but there are many moving parts to how they are calculated and this is not guaranteed.
Smith-Hughes says: “Bond yields have been behaving strangely this year, and that is largely due to uncertainty. That uncertainty is not over.”
Given the big increase in annuity rates, an annuity as part of retirement strategy alongside drawdown is looking increasingly attractive.
Regulatory focus
Meanwhile, the Financial Conduct Authority is also turning its focus to the decumulation part of the customer journey; looking more closely at retirement income strategies over the next few years to better understand the market and the decision-making process behind such strategies.
Cecilia Furner, interim distribution director – retail annuities at Legal & General, says the regulator has specifically expressed concerns about the role drawdown has played since the introduction of pensions freedoms as it continues to gather evidence of outcomes in this area.
She adds: "While the FCA has not reported evidence of specific harms, the sheer size of the market and the relative complexity of the decision-making process means the regulator is keen to understand more, given the potential for consumer harm.”
According to Ormston, the introduction of investment pathways is a likely insight into the FCA's thinking.
The pathways in their current form are solving one particular issue – ensuring that putting all of one's funds into cash is an active decision – but they could also lay the foundations for a short to mid-term retirement income strategy.
He says: "The communications and regulations that the FCA have put in place for DB transfers show just how highly the regulator views guaranteed income. With this in mind, I suspect guaranteed income will play a central role in any retirement income strategy laid out."
But Ormston offers a word of caution, saying he hopes the regulator does not “fall into the trap of looking solely for best outcomes”, as these will likely only be achieved through regular engagement and potentially personal holistic financial advice.
He adds: “Instead, I hope the focus is on protecting against harm, which can typically be achieved by combining a drawdown plan for investment exposure and flexibility, with an annuity to provide security and longevity protection.”
