Experts are urging anybody who is keen to buy an annuity to act now as they can get up to £2,500 more income than just a couple of years ago. Yet this opportunity may not last for much longer.
An annuity is the guaranteed lifetime for income that retirees can buy with their pension savings, and until 2015, they were legally obliged to do so.
Sales collapsed overnight once that obligation was withdrawn under pension freedom reforms, as retirees rebelled against restrictive, poor value annuities.
Most now choose to leave their money invested via drawdown, which allows them to benefit from stock market growth and the flexibility to withdraw lump sums as required.
Drawdown has many benefits but there is also a danger of depleting your pot, something that will not happen with an annuity, as the income is guaranteed to continue for life, no matter how long you live.
At the start of 2022, before inflation took off like a rocket, a 65-year-old buying an annuity with £100,000 got income of as little as £4,540 a year, said Nick Flynn, retirement income director at Canada Life. “Roll the clock forward two years and that same annuity pays around £7,000 a year, an increase of 54 percent, driven by rising interest rates and the returns available on gilts.”
Over the course of a 20-year retirement, today’s annuities deliver around £49,200 extra income compared to an annuity sold in January 2022, Flynn added.
Demand rocketed as a result, with provider Canada Life selling £1.2billion worth in a year, and sales across the market rising 43 percent in 2023, according to the Association of British Insurers. Flynn said: “The annuity market is incredibly busy, in a boost pensioners seeking retirement income security.”
The great annuity rate rebound will infuriate those who locked in before interest rates started to recover, who are unable to exchange their policy for one paying higher income.
Annuity rates are closely linked to the yields on UK government bonds, known as gilts, which are in turn affected by the Bank of England base rate.
The BoE has held base rate steady at 5.25 percent for the past seven months but with inflation falling markets expect the first cut in May or June.
At that point, annuity rates may start to fall, too. In fact, they could fall before the first cut comes through, as markets anticipate the change.
The process may have started, with the Standard Life Annuity Rates Tracker showing a 65-year-old with a £100,000 pension pot can expect income of £6,890 a year, rather than £7,000. However, that is still £440 more than a year ago, a rise of 6.89 percent.
Pete Cowell, head of annuities at Standard Life, said pensioners prize annuities for the certainty of income they offer, but said it does not have to be a “one-and-done” approach.
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Annuities pay more as you get older and life expectancy shrinks, so it can make sense to use a chunk of your pension to buy an annuity today, while keeping money in reserve to buy another later.
Buyers have to choose between a level income, which pays more today but will never increase, or an escalating one that rises with prices but from a lower starting point.
Andrew Tully, technical services director at Nucleus Financial, said for those unsure whether to buy an annuity, there is a halfway house. “You could split your pension between an annuity and drawdown, giving the best of both worlds.”
If tempted, do not wait too long. There is a chance that in a few months time, annuities could pay just that little bit less than they do today.
