Why appealing annuity rates might not be around for long
Purchasing a pension income for life has surged in popularity due to favourable deals – but that is expected to change. By Callum Mason
Annuity rates have jumped back up in recent months, allowing those who want to buy a pension for life to secure a bigger annual income. However, experts warn they could soon begin to fall again.
For a long time, annuities – which give a guaranteed income for life – were viewed as poor value. Three years ago, a healthy 65-year-old with a £100,000 pension pot would only be able to get an annual payment of £4,700. But over the past two years, annuity rates have risen in line with the Bank of England hiking interest rates.
This means that last November, the same 65-year-old would have been able to get an income of around £7,000 a year instead, an increase of nearly 50 per cent.
In January, the figure dropped below £7,000 due to expectations that the Bank would cut interest rates as soon as March or May, but recent delays mean retirees can now get above £7,000 again.
This is because one key factor in pricing annuities is the value of UK gilts, essentially “IOUs” issued by the Government, which are linked to the base rate. It now stands at 5.25 per cent and has been held at this level for six consecutive meetings.
Time for change?
Experts have warned this opportunity may not stay around for long, as a hold in the base rate this week is likely to be one of the last such decisions. The rate is expected to decline later this summer or in autumn. Economists polled by i earlier this week said that a cut in August was the most likely option, although one could take place as soon as June.
“If the Bank of England base rate forecasts come to fruition, we will likely start to see annuity rates decline in parallel. If someone is considering purchasing an annuity in the near future, it may be prudent to obtain quotes sooner rather than later,” said Mark Ormston, director of propositions and corporate partnerships at Retirement Line.
Helen Morrissey of Hargreaves Lansdown, added: “Annuity rates may have fallen back from the dizzying heights we saw in the aftermath of the “mini-Budget” but they are still offering the best value we’ve seen in years and interest remains high. “With a cut in interest rates expected in the coming months, we will likely see these incomes drop back – so we could see more people opt to take the plunge before this happens. It’s also worth saying that even though annuity incomes could fall in the coming months, we are still a long way away from seeing them hitting the lows we saw immediately post-Brexit.”
Nick Flynn, retirement income director at financial services firm Canada Life, said the market for annuities was “incredibly busy” at the moment. The company reported individual annuity sales of £1.2bn for last year, which was a record. “While it may be a fool’s paradise to predict annuity incomes in the future, what I know today is that 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,” Mr Flynn added.
Should I buy an annuity?
Whether an annuity is the right product for you, and exactly how valuable it will be, depends on your individual circumstances, including your health. Annuities are not the only way to access your pension – if that is your main motivation for choosing one. Demand for them waned after the Government introduced a range of “pension freedoms” in 2015, meaning people no longer had to take one out and could instead use drawdown, where you take money from your retirement savings while they stay invested.
“An annuity is the only retail pension income product which guarantees a level of income for at least the purchaser’s life,” said Mr Ormston. “However, purchasing an annuity is an irreversible decision, with this in mind careful consideration should be given.”
He added: “Annuities can be tailored to match individuals’ needs and circumstances and it is always important to remember people can have a ‘blend’ of pension income products. Nobody has to put all of their pension savings just into an annuity or solely in drawdown; they can have both.”
Experts have warned that you should seek financial advice if you are unsure about your decision. “Always seek the advice of an annuity specialist or regulated financial adviser before taking any such decisions” said Mr Flynn.
“These professionals will help guide you through the myriad of options available, whether that be 100 per cent value protection, longer guaranteed periods, or simply taking your health and lifestyle into account, which may result in a better income.”