Time to get an annuity pension – or risk your retirement income
Higher interest rates have boosted guaranteed income for life options, but the outlook is uncertain, reports Mari Novik
Annuities are back on the table for retirement, but savers should act sooner rather than later if they want to nail down one before payouts fall, experts have warned.
Annuities offer a guaranteed annual income in retirement. They offer an alternative to drawing down money from a pension pot, which could eventually run out, particularly if a retiree lives longer than expected.
While they have been unpopular in recent years, rising interest rates have improved the annual incomes someone can buy.
Now, a healthy 65-year-old with a £100,000 pension pot could buy an annual income worth £7,000, compared with just £4,540 at the start of 2022, up almost 55 per cent, data from annuities provider Canada Life shows.
Over the course of a 20-year retirement, this would deliver around £49,200 extra income.
But for retirees opting for one, time may be of the essence. As inflation is cooling, the Bank of England is likely to cut interest rates later this year, today’s good rates may not last indefinitely, experts said.
Most experts expect the Bank of England to cut interest rates in June or August.
According to Nick Flynn, retirement director at Canada Life, an annuities provider, is that the value of an annuity is at a good place historically. “Given where we’ve been in the recent past, this is clearly a positive story for the many customers seeking retirement income security,” he said.
Demand for annuities waned after the Government introduced a range of “pension freedoms” in 2015, meaning people no longer had to take one out.
However, since 2021, when interest rates started to increase, they have returned to popularity with rates soaring. As the Bank of England sets the base rate, this in turn changes the yields on long-term government bonds, or gilts, which are closely linked to annuity rates. As a rule, a 0.3 percentage point rise in yields on gilts would increase an annuity by 3 per cent, said Mr Flynn. “Right now, the annuity market is incredibly busy,” he said.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Now is a great time for people in the market for an annuity,” adding that as the outlook for annuity rates is hard to predict, people may want to look into buying one sooner rather than later.
“We’ve seen many unexpected twists and turns in recent years so it’s hard to look too far into the future but annuities are delivering good value for money right now,” she said.
Morrissey said that while inflation remains sticky and the Bank of England keeps interest rates on hold, the current annuity rates may stick around for some time.
“When the Bank starts cutting rates, annuity rates will unlikely fall at anywhere near as fast a rate as they rose,” she said.
Whether an annuity is a good option will depend on someone’s circumstances. People often have to weigh up immediate income needs while also having to think about the long term. “People should not just jump in because rates are good – you need to make sure it’s the right decision for you,” said Morrissey.
Returns could be fast eroded by inflation – and the rates for inflationproofed annuity products have not increased by nearly as much as those not inflation-proofed. If you want inflation protection built into your annuity, the starting amount paid out on £100,000 falls to just £4,350 annually.
There’s also no income flexibility with annuities: you’d receive the annuity income and pay tax on it every month.
Another concern people have about annuities is that once bought, there’s no going back. Annuities are not reversible and can’t be traded for a pension pot – so people worry about timing the market.
Morrissey said: “You don’t need to annuitise your entire pension in one go – you can do it in slices over several years. This way you can lock in income as you go while potentially leaving the rest of your pension invested where it can grow further,” she said.