Summing up: Don’t bet on annuity rates improving

Alan Steel, managing director of Alan Steel Asset Management. Picture: TSPL

Alan Steel, managing director of Alan Steel Asset Management. Picture: TSPL

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ONLY a couple of weeks ago it was summer. Suddenly it’s almost December and before we know it 2015 will have arrived, provided we survive the trauma that is Christmas. So maybe it’s time to consider what next year has in store for investors instead of waiting until our New Year hangovers.

Demographics might offer a clue. Next year we’ll all be a year older (if we’re “spared”, as my granny used to say) and as we age we behave in predictable ways.

The fastest-growing age cohort is the 100-plus group, expected to rise more than 200 per cent by 2035. That’ll play havoc with the Queen’s telegram budget. And the second-fastest growing group? The over-80s.

Depositors and annuity doommongers moan about low rates of return and point to the “normal” higher rates of not so long ago.

Well, the bad news is that next year, and probably for years to come, you can forget about a return to those “normal” days of the 1970s and 1980s. That was an abnormal period caused by the baby boom of 1946 to 1963, which caused massive supply and demand imbalances. The birth rate has fallen ever since, removing inflationary pressures and keeping interest rates low.

Look back and you’ll see that inflation and interest rates went through the roof after the late 1960s. Look forward and you’ll see why savers should be searching for alternative income strategies as the elderly population booms.

From 1900 to 1960, the gilt yields that dictate annuity rates averaged 3.7 per cent. From 1960 to 1969 they averaged 6.5 per cent, rising to 11 per cent in the 1970s (hitting a high of 17 per cent in 1974) and then 11.2 per cent in the 1980s (with a peak of almost 
16 per cent in 1981).

And since the baby boomer generation began to enter retirement? Over the last 15 years gilt yields have averaged 3.9 per cent, with present rates under 3 per cent – just like they were 100 years ago.

And I don’t see them moving much, which is not good news for older savers. A Mintel survey of people aged 45 or over found that 36 per cent of them rely on savings deposits for income.

What about the stock market outlook? The S&P 500 in the US has racked up total returns of 119 per cent, compared with just 37 per cent from the Virgin UK Index tracker (according to Lipper data). And yet investors in the UK are still piling into trackers. If you don’t fancy the US, your best bet for long-term high returns are shares in small companies.

This year has been disappointing for most investors here, but that’s no surprise following a stonking 2013. As the black headlines gather again around debt, Japan, Europe and – yet again – bird flu, what can we expect for 2015? Well, the good news is that when the consensus is gloomy it’s usually a positive sign.

It’s time to forsake UK trackers. The FTSE is still below where it was 15 years ago while the US, even before you take reinvested income into account, is up 340 per cent over 20 years.

Demographics, fortunately, offer guidance. Income funds should continue their steady rising returns next year and beyond, while healthcare shares seem set to continue their winning streak as we all get older and fall apart. Cheers!

Alan Steel is chairman of Alan Steel Asset Management

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