Yet this moment won’t last forever. At some point, interest rates will peak and start falling again. When that happens, the opportunity could pass.
I’ve been repeatedly telling savers they should consider locking into a best buy fixed-rate bond which currently pay up to 4.60 percent a year.
Somebody who takes out the United Trust Bank’s table-topping five-year fixed-rate bond would get 4.61 percent a year all the way through to 2028.
That could soon become an inflation-busting return, with the Office for Budget Responsibility (OBR) predicting consumer price growth will fall to 2.9 percent by Christmas, then to just 0.9 percent in 2024.
Of course, there are no guarantees this will happen. Forecasting the future isn’t easy and inflation could stay high instead.
Yet I still think this opportunity is worth highlighting and here’s another one worth looking at.
Pensioners could take advantage of today’s high interest rates by locking into a top annuity rate.
This way they can secure a guaranteed income for life, not just five years.
Annuities, which pay a guaranteed income for life, fell out of favour after the financial crisis as plunging interest rates destroyed returns.
A 65-year-old buying a single life annuity with £100,000 of pension would have got around £8,000 a year before 2007. By 2016, they’d have got just £4,500.
Annuity sales collapsed when 2015’s pension freedom reforms released Britons from the obligation to buy an annuity at retirement.
Most now prefer to leave their retirement savings invested via drawdown, allowing them to benefit from stock market growth while dipping into their pots to fund spending.
I understand that. It’s probably what I’ll do when I retire.
Yet annuities have staged a comeback since December 2021, when the BoE started hiking base rates from 0.1 percent as it battled to curb inflation.
Today, a healthy 65-year-old with a £100,000 pension pot can buy a level single life annuity worth £6,800 a year.
That’s a staggering £2,300 more income than they were getting just 18 months ago, worth a total of £46,000 over a 20-year retirement.
It’s the equivalent of 6.8 percent a year, although annuity income is not directly comparative with the interest rate on a savings account.
When you put money into a fixed-rate savings bond, you get regular interest every year with all of your capital returned at maturity.
With an annuity, you don’t get your capital back. That’s the price you pay for the guarantee of a lifelong income (which continues as long as you do).
A lot of pensioners don’t fancy that, which is understandable.
Yet buying an annuity today may appeal as rates have improved dramatically while drawdown values have been hit by stock market volatility.
READ MORE: ‘Best there is’. Savings expert hails best buy 4.70% rate
Andrew Tully, technical director at Canada Life, has seen demand for annuities rebound as rates improved. “Pensioners are getting a better return on their money and many appreciate the security of a guaranteed income for life.”
The BoE is expected to hike base rates once again next month to 4.50 percent, and they could even hit five percent as inflation proves sticky.
Annuity rates may increase slightly as a result, but providers will be wary of hiking too much in case inflation does fall as predicted.
Today’s annuity rates probably won’t climb much higher from here, Tully said. “If you feel the time is right to lock into an annuity, it may be worth acting this year.”
Buying an annuity is not an all-or-nothing decision. You could use a small of part of your pension to buy one today, then buy more later when you are older and your life expectancy is lower, giving you more income.
Choosing between an annuity or drawdown is a tough decision. What people do very much depends on their personal circumstances.
Many pensioners prefer to leave their money invested to grow, plus they can also pass on any unused pension to loved ones when they die, completely free of inheritance tax.
Another risk is that if you buy a level annuity where the income doesn’t rise, it could be eroded by inflation.
So it’s a tough call. I just wanted to alert people to the fact that if they do fancy buying an annuity, now could be a pretty good time.
Job done.
