Over the last few months, we have seen some changes to the outlook for people who are about to retire, and those who have retired.
Are annuities attractive now?
We have seen further improvements in annuity rates and rates are now attractive in some circumstances. On 11th August 2023, the best annuity rate for a joint life annuity, increasing in line with inflation, for a man and woman aged 66, was 3.8% (the annuity would not reduce on first death, but stop on second death. Rates are for healthy lives, who do not smoke). Interestingly, life expectancy for a 66 year old woman is 21 years, and 19 years for a man. There is still only a handful of companies in the annuity market – new entrants would create more competition, but there is very little evidence of new entrants into this market.
Deposit interest rates
Higher interest rates have been feeding through and interest rates for deposit accounts are higher than they have been for many years. The best interest rates for one-year fixed term deposits are now around 6%, whilst the best immediate access, variable rate accounts pay interest of around 4.8% (1). The larger banks seem reluctant to increase interest rates on deposit accounts (the best one year fixed term deposit account offered by one of the larger High Street banks (2) was from Halifax, paying a rate of 5.18%, and the best easy access account offered by one of the larger High Street banks was from Halifax, paying a rate of 4.2% (1).
Analysis by Fidelity International tells us that the market is expecting Bank of England base rate to rise to 5.70% from the current 5.25% before it starts to decline. Markets have been fairly poor at predicting the direction of UK interest rates, but it does seem likely that rates will continue to rise in the short term.
Investments and Residential Property
The outlook for investment markets remains uncertain, which is the usual state of investment markets! This uncertainty is one of the reasons why investors tend to benefit from higher returns in the long run, and our view remains that patience is a key personality trait for successful investors. At the last couple of investment committee meetings, we have reviewed the main assets we recommend to our clients, and we have not recommended any changes. Our view remains that a combination of shares, fixed interest stock, property and cash will continue to serve most investors well for the long-term.
Analysts have been reporting some fairly minor falls in the values of UK residential property; the falls in value seem to be much smaller than the increases in 2022. It seems likely that the uncertainty in this market will continue for the foreseeable future. There is a risk that the Bank of England’s only tool to reduce inflation (increasing interest rates) will result in further reductions in value. My concern is that the proportion of households with a mortgage is lower than it has been for the last twenty years, and most mortgages are on a fixed rate. This means that there is a greater risk that the Bank may make a policy mistake – resulting in a greater slowdown in the economy than intended. However, in the long run, it does appear that very little has been done to address the excess of demand over supply in the UK housing market, and this should continue to be a positive for residential property.
Many of our clients have holdings in the TM Home Investor fund. The fund experienced a large number of redemptions in the early summer, and, as a result, the fund has closed temporarily. This means that, if you have a holding in the fund, you cannot sell it. This type of thing is not unexpected for a property fund – it takes time to sell a property, and this is true for the properties in the fund too. The fund managers have suspended the fund whilst they are selling properties, in order to be able to manage the redemptions requested. We will keep you updated.
Retirement Spending
The rise in the cost of living is affecting retirees, as well as those who are working. Most retirees, fortunately, own their homes outright, so the increase in mortgage interest rates has not affected them; many have benefitted from the rise in deposit interest rates, in fact.
However, anecdotal evidence points to an increase in spending by retirees on healthcare. In particular, we have noticed that many of our clients are now opting to pay for private operations and treatment, rather than waiting on an NHS waiting list. Much seems to depend on the cause of the operation or treatment, and where you live. However, this is an additional expense that many retirees are having to factor into their plans.
We have also noted an increase in the cost of residential care in our region. There is very little hard data to back up our observations, but it does seem that there has been a fairly sharp rise in the cost of care locally. The minimum cost of residential care now seems to be in the region of £6,000 per month, with many care homes charging more than this. This makes sense, as pay and associated costs (such as National Insurance and pensions) are the largest item of expenditure for most care homes. We have always suggested that clients include a plan for the cost of care in their retirement plans, and this increase in cost has increased the potential cost of retirement. We will report with more information about this in future blog posts.
If you would like to discuss any of the items in this post, please contact me.
Philip Wise | philip@sussexretirement.co.uk
Managing Director and Chartered Financial Planner
(1) Sourced from moneyfactscompare.co.uk on 11th August 2023.
(2) Barclays, Halifax, HSBC, Lloyds, NatWest and Santander. I only included accounts which did not require you to have or set up another account with the same bank, in order to open the account in question.
