Lift income for life as annuity rates shoot up

ANNUITY rates have rocketed this year, giving pensioners thousands of pounds in extra income, but many are still wary of buying one.

An annuity is the guaranteed income for life you can buy with your pension, but demand plunged as many viewed them as poor value and restrictive.

This year the amount of income a healthy 65-year-old could buy has jumped from £4,521 to around £7,584 a year for life.

Annuity rates have shot up due to rising interest rates and improved gilt yields, which are used to underpin the income annuity companies pay.

They could climb even higher with the Bank of England expected to increase base rates from 3 per cent to at least 4.5 per cent over the winter, as it battles to combat inflation.

Yet many still prefer to leave their pension invested via drawdown. One reason is that once you buy an annuity you are stuck with it, and cannot change your mind later.

Stephen Lowe, the group communications director at retirement specialist Just Group, said many have another worry: “They fear that if they are hit by the proverbial bus and die just after taking out an annuity, the income will die with them.”

He said buyers can get round this by purchasing a “guaranteed” annuity, that pays income for a minimum period regardless of how long you live.

Annuity buyers can choose their guaranteed period, which could range from one to 30 years. “It will reduce the annual income paid, but the reduction is actually quite modest,” he said.

Just Group would pay a healthy 65-year-old with a £100,000 pot income for life of £7,310 a year, with no guarantee. If they bought a five-year guarantee the income would drop only slightly to £7,284 a year, falling to £7,074 if they took a 15-year guarantee.

“However, that 15-year guarantee would secure a minimum return of £106,110 if the policyholder died in that time, which is more than the annuity cost to buy,” Lowe said.

If the policyholder lived longer than 15 years the annuity would continue for life.

Canada Life technical director Andrew Tully said buying an annuity can protect you against stock market volatility by guaranteeing your income for life: “By contrast, if you leave your money invested in the stock market via drawdown, it could fall in value or run out.”

Tully said shop around to get the best possible rate, and tell your annuity company if you have health or lifestyle issues: “About two-thirds of retirees can get up to 15 per cent a year extra income if they do.”

He added that pensioners can keep some pension invested in drawdown, and buy an annuity with the rest. “Or you could buy several annuities, spreading your purchases out over the years to secure more income as you get older,” he said.

Many will be tempted to wait just a little longer before locking into an annuity, as rates could climb further.