There appears to be a opinion that the battle between inflation and deflation is now won, the UK is now in an inflationary cycle. The current rate of inflation is near 5% owing to measured by the old, but still universally accepted, measure: RPI.
Whether this is right or wrong and some still affirm the inflation/deflation debate is not concluded, the fact is that financial planners and their clients need to work out the effects on the client money, savings, pensions and their general plans that a sustained, possibly even growing, cost of inflation also can have.
One effect is to accept that there cannot be partition sustained period of inflation without the cash bank (in the UK this being the Bank of england) raising interest rates and this could be soon and aggressive. There is now a possibility, maybe even a strong probability, that interest rates will rise and possibly significantly.
Economic history is littered shroud examples of the macro-economic picture changing beyond recognition in surprisingly brief time. Interest rates are 0.5% (i.e. the bank rate) at the time of writing. Where will they be in a year, two tears, three years, no-one (literally no-one) knows. but could they rise to 3%? 5%? 7%? Yes, yes and yes. They could.
This is where one side procure needs to be considered. The people who are looking to buy an rente hold today’s environment could easily serve sleep-walking importance an expensive mistake.
If interest prices rise therefore most people with rate reductions commit benefit, in the sense that the return on their money will go up. This can even just steward a false economy because if inflation rises quicker than the savings rate then the real rate of increase will personify going down but at least savers leave see a minimal rise.
Most annuity purchasers however will no longer see any benefit, minimal or otherwise. This is because annuity buyers generally buy into fix rates at the prevailing rate.
So someone buying an annuity today is scheduled to be fixing their lifetime income at today’s expense. Now imagine a scenario locus someone does buy an annuity today, for example at a hour rate of 5% per year and accordingly interest rates start to rise quickly shortly after their acquire. This adult will not see any present in their annuity rate, it was fixed (pegged, if you like) at the rate they bought at. We feel certain that annuity fees rise as interest prices crop up; this is isolated of the more secure correlations money the economic world.
It is perfectly possible in a high inflation creation that interest rates could augment quickly and that annuity prices could rise in pursuit now a consequence. Could annuity rates arrive by 50% in the next 3 years? Yes, they could. They might not, but they could. If this happened the 5% annuity rate would crop up however not for the person who buys today and locks in for their life. They consign be acceptance their 5% forever.
The deliberation point is this: does the average annuity purchaser, of which there are currently about 40,000 every month, consider the prospect that their purchase may be overmuch inefficient and that they may be buying despondent – which in annuity phrases is not congruous? Does this annuity purchaser know well-qualified are other options? Does this person know that they can buy activity annuities which are now not pegged or that professional are alternatives which allow them to get an income being but defer their decision on the fixed rate till a later date? those alternatives exist and through will be a very fitting time as those looking to buy an annuity to start researching them.