Annuity rates have hit a six-month high as they edge back on to the pensions radar amid interest rate hikes.
Data from Hargreaves Lansdown show that a 65 year old with a £100,000 pension can get an income of up to £7,017 per year. The last time rates rose to this level was December 2022, after the mini-Budget spooked the market.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Rates are still some way off the highs we saw in the weeks following the mini-Budget when the same person could have got an income of £7,586 per year but if we compare them to where they were two years ago (£4,979) then people are certainly getting far more for their money than they once did.”
According to the figures, if a 65 year old lives to the average life expectancy for a healthy person of around 86, then they would get a total of £143,357 in income for their £100,000 outlay, compared to the £105,000 they would have received in January 2022.
Annuity rates – the amount of income per year retirees receive for a certain lump sum – are linked to bond yields and interest rate expectations. In May, the Bank of England raised interest rates to 4.5%, the 12th consecutive rise since December 2021 when rates sat at just 0.10%, while inflation readings for April continued to be high at 8.7%.
Morrissey continued: “After years of being consigned to the sidelines of retirement planning annuities are once again taking centre stage and with more interest rate rises on the horizon there’s every chance, we could see further income increases in the months to come.
“For those in need of some level of guaranteed income in retirement then annuities should always be a consideration. However, their reputation for being inflexible and offering poor value for money has made people hesitate. Their improved fortunes will certainly prompt more people to take a closer look.”
Morrissey said those concerned about locking into an annuity and potentially missing out on increased income in future could consider annuitising their pension in tranches throughout retirement rather than in one transaction. This enables retirees to build guaranteed income as their needs increase while leaving the rest invested to grow further.
Gary Smith, partner in financial planning at Evelyn Partners, said current annuity levels could present an “attractive buy-in point” in the coming weeks and months.
“Annuities became very much the poor cousin to drawdown for the majority of savers accessing their pension pots when pension freedoms were introduced in 2015. Not least because interest rates and therefore annuity rates were at rock bottom, making annuities a poor-value option for many. Also equity markets were in the middle of a 12-year bull run, and bond markets very stable, making drawdown attractive.
“With uncertainty in equity and bond markets giving drawdown fans pause for thought, boring old annuities have returned to the radar of many pension savers approaching retirement.”
However, Smith said taking an income from investments in drawdown without running down a pot too quickly “can be a tricky business”, particularly when pensioners’ outgoings are rising with inflation and depleting savings more rapidly.
Smith said options can become even more complicated when deciding on options like whether to pay for extra for an inflation-linked annuity and whether to add on death benefits for family.
Smith added: “It’s these sorts of calculations that can really benefit from expert advice, not least because they should be viewed in the context of one’s overall financial set-up.
“As the market volatility of the last couple of years has exposed savers to the rockier side of drawdown, with many fund values suffering, it should also remind them of the wisdom of gradually building up a cash or cash-equivalent reserve in one’s pension portfolio before retirement becomes a live issue. This gives them more leeway to absorb stock market shocks while they use the cash to either live on or buy an annuity.”
