Annuities enjoyed a bumper year in 2023, as rising rates boosted sales to £5.2 billion.
A healthy 65 year old with a £100,000 pension pot can now get up to £7,430 per year from their annuity, according to data from Hargreaves Lansdown.
This compares to around £4,540 a year at the start of 2022.
The sharp rise in rates has been driven by rising interest rates and the returns available on gilts. Over the course of a 20-year retirement, an annuity at today’s rates would deliver around £49,200 extra income compared to an annuity sold in January 2022, says Canada Life. But what does the future hold for annuities?
Nick Flynn, retirement income director at Canada Life, said: “The annuity market is incredibly busy as clients seek to capitalise on the relatively high incomes currently on offer. Whilst I don’t have access to a crystal ball to predict the future, annuity rates are closely linked to the returns available on government bonds.
“As the Bank of England sets the base rate, this in turn changes the yields on these bonds. While we continue to see inflation higher than the 2% target rate set by the Government, the Bank of England will tread very carefully before considering reducing the base rate. While it may be a fool’s paradise to predict annuity incomes in the future, what I know today is customers looking for income security, either at the point of retirement or at the point of de-risking their drawdown strategy, can now get much better value from their choice of an annuity.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, echoes the sentiment, noting that after a “rollercoaster ride” for the retirement product in recent years, today’s rates continue to look attractive for retirees.
“The good news is that in recent months, incomes have been quietly on the rise and a 65 year old could now get up to £7,430 per year from their annuity, just a shade away from its post mini-Budget highs and the highest we’ve seen since last October. The market realised it over-egged how soon and how fast rates would fall so are quietly planning for them to be slightly higher for longer than it previously expected.
“It shows that annuities continue to deliver the best value we’ve seen in years and we can expect to see interest in them continue to grow from people looking to secure a guaranteed income in retirement.”
Morrissey said that for people concerned that purchasing an annuity cannot be reversed and they may potentially miss out on a future market upswing or better rate, they are under no obligation to annuitise their entire pension in one go.
“You can annuitise your pension in stages allowing you to lock in guaranteed income as you age and giving you the potential to benefit from higher rates as you age,” she added.
