Brits thinking of using their pension pots to buy an “income for life” through an annuity have been handed a massive cash boost.
The current cloud over the UK’s finances and the impact of the October budget from Rachel Reeves has come with a silver lining for some pensioners.
Industry experts say the fact that the UK government has to pay high interest rates on the billions it is borrowing has also increased the size of the annual income that a retiree can purchase through an annuity.
Pension companies offer an annual income for life – generally 20 years – based on people using part or all of their pension pot to buy an annuity.
The size of this annual income depends on how much these firms can make by investing these pension pot lump sums, which are currently much higher than expected.
As a result, someone using £100,000 to buy an annuity has seen the annual income this can buy rise from £6,431 a year at the start of 2024 to £6,843 now. That equates to £412 more a year and an extra £8,241 over 20 years
And, for someone with £200,000 to buy an annuity, this means the annual income would rise from £12,862 to £13,686 – an extra £824 a year or £16,480 over 20 years.
Canada Life said: “Whilst it was generally assumed that annuity rates would fall dramatically in 2024, as interest rates and gilt yields were expected to drop, expectations were defied and it proved to be another highly fruitful year for annuity customers.
“The first full week of 2025 saw a dramatic spike in government borrowing costs, with the 15-year gilt yield standing at 5.179 percent compared 4.23 percent on the same date in January 2024.
“Furthermore, with financial markets reducing their expectations around the number and speed of interest rate cuts in 2025, it is looking increasingly likely that the return of annuities is not just a flash in the pan and is possibly here for the longer term.”
The company said annuity rates are largely linked to the return on government gilts – the return that is provided when effectively lending the government money.
Nick Flynn, Retirement Income Director, Canada Life, said: “Additional government spending, global uncertainty and higher taxes are all contributing to the recent increase in the cost of government borrowing.
“Whilst there are no cast iron guarantees, if this trend continues, then it’s a strong possibility that annuity rates will be maintained or even increase in 2025.”
He added: “Annuities offer individuals security and a guaranteed income for life. However, it’s important to seek the advice of an annuity specialist or regulated financial adviser who will be able to help you find the best annuity product for you, with potentially wider benefits for your spouse or loved ones included too.
“Either way, be sure to shop around for the best option as opposed to accepting your existing insurer’s offer as the decision to purchase an annuity is irreversible.”
