Annuity rates have hit a 14 year high, while sales rose 13% in 2021/22 according to FCA data.
Annuity sales plummetted over the last decade or so, in part as a result of the low rates on offer and in part because of the popularity of the pension flexibilities introduced in 2015.
However, rising gilt yields have boosted the annuity rates insurers can offer. This means the break-even point at which a pension saver receives their original pension back through income, has fallen by seven years from 22 years to just 15 years.
Canada Life said a benchmark annuity of £100,000 at age 65 would now pay a guaranteed income of £6,873 a year, compared to £4,521 at the start of 2022.
Inflation-linked annuity rates have also seen an impressive jump over the last nine months, with rates improving by 77%. A benchmark £100,000 annuity linked to RPI will now pay a starting income of £3,896, compared to £2,195 at the start of the year.
Nick Flynn, retirement income director at Canada Life, said: “It’s has been a record-breaking year for annuity rates, with incomes at a level we haven’t seen for over a decade. I’d need to look back to before the banking crisis of 2008/9 to see annuity rates at a similar level as today.
“In the current economic climate, where else could you receive nigh on 7% risk free income in retirement? That is how strong annuity rates are right now which is why they are worth more than just a second glance.”
With the right guarantees and value protection options, Flynn said annuities now give drawdown “a good run for their money” and said clients planning their retirement or looking to de-risk their investment portfolios should consider annuities.
Flynn added that clients should also look at using annuities alongside drawdown, rather than viewing in isolation or having all their eggs in the one basket.
Phasing annuity purchases throughout retirement can not only de-risk the retirement journey, but clients can also benefit from better annuity rates as they get older” said Flynn. “With the right value protection, you can also ensure [their] wealth is protected and can be passed to loved ones.”
Commenting on the latest figures, Tom Selby, head of retirement policy at AJ Bell, said: “It is vital for UK savers that there are both healthy annuity and drawdown markets, so the rise in annuity sales and recent improvement in rates is good news.
“All-too-often retirement is presented as an ‘either/or’ choice between annuities and drawdown. In reality, the right option will generally be a combination of both. For example, you could use an annuity to cover your fixed costs in retirement, while retaining flexibility and the opportunity for investment growth with the rest.
“The annuity rate you can get also tends to get better as you get older, so it can make sense to opt for a flexible income when you’re younger before shifting to an annuity in your 70s or 80s. The key is building a retirement income plan that fits your needs and lifestyle.”
