Pensioners earn £13,000 more as interest rates rise

Annuity rates have shot up at the fastest pace in more than 30 years, with providers paying out thousands of pounds more to new pensioners.

The contracts, which exchange a lump sum of savings for a guaranteed income until death, have staged a comeback, as payouts jump up from all-time lows. This followed increases in the Bank Rate and the subsequent rise in government bond yields.

Income paid by annuities is priced off gilt, or UK government bond, yields.

The higher the yield, the more someone buying an annuity receives each year until they die. Annuities have offered poor value for more than a decade, with the average buyer handing over significantly more as a lump sum than they received in income.

With the Bank Rate rising to 1pc, up from 0.1pc in December, a new annuity bought for a £100,000 lump sum now pays out £13,000 more on average over the course of a retirement than one bought last year.

A joint-life annuity, which continues paying out after the death of a partner, now pays out £317 more every year than one bought in April, according to Retirement Planning Project, a financial adviser. This was the largest month-onmonth rise in more than 30 years.

A 65-year- old who buys a single-life annuity, which stops when the policyholder dies, with £ 100,000 now receives a yearly income of £5,750. This is £650 more than if they had bought at the start of the year, according to Retirement Line, another adviser. In April 2021, the same pot bought a contract that paid just £ 4,882. Single- life annuities now pay £13,000 more than they did in January for every £ 100,000 spent over the course of an average retirement.

William Burrows of Retirement Planning Project said: “There is always a lag in relation to the Bank Rate, but annuity rates should continue upwards. We could expect them to pay out £500 more every year very soon.”

Nick Flynn of Canada Life, an annuity provider, said: “Our rates have improved by 20pc since January, which is one of the quickest hikes in prices of recent years.” A greater number of pensioners have requested quotes as a result, he added.