The significant improvement in annuity rates over the past 18 months has brought forward the break-even point for annuitants to receive their original investment by five years, says Canada Life.
According to the investment specialist, the net result of the annuity rate improvements means the payback period on a £100,000 annuity is now 14.5 years for a 65 year old, which generates an income of £6,907. This compares to an income of £5,240 five years ago, with a break even point of 19 years.
A benchmark annuity for someone aged 65 with no pre-existing health or lifestyle conditions would pay in the region of 6.9%, Canada Life said.
Nick Flynn, retirement income director at Canada Life, commented: “It’s been a long time coming but annuities are firmly back in fashion, driven by the significant improvement in rates. This is evidenced by the break-even point, the tipping point at which you receive your original investment back through income. This has moved forward by nigh on five years, which shows just how much the market has moved in a relatively short space of time.
“Annuity rates are currently at levels not experienced since the banking crisis of 2008/9, which shows just how far we’ve come. It’s difficult to predict where annuity rates will go, but markets have already priced in interest rate movements, while yields on gilts have stabilised.”
However, Flynn said retirement choices shouldn’t be a binary decision between annuity and drawdown and retirees should consider blending the two to gain both a risk-free retirement income and flexibility.
[Main image: piret-ilver-98MbUldcDJY-unsplash]
