Annuity rates hit record high despite market turmoil but Bank of England interest rate decision looms
RETIREES can now secure record annuity incomes, offering a glimmer of hope amid ongoing financial uncertainty.
An annuity is a product you can buy with your pension pot that gives you a guaranteed income in retirement.
A 65-year-old with a £100,000 pension pot could receive up to £7,882 per year with a single-life level annuity and a five-year guarantee, according new data from Hargreaves Lansdown.
This represents a substantial 63% increase compared to rates available five years ago.
Inflation-linked annuities have also seen significant growth, with options offering a 3% annual increase now providing up to £5,786 per year.
This resurgence in annuity popularity follows a period where they were considered a declining product.
However, experts warn that this upward trend may be short-lived.
Anticipated interest rate cuts by the Bank of England in May could push down annuity rates in the coming months.
While a significant drop is not expected, retirees considering annuities should be aware of this potential shift.
However, Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said savers shouldn’t panic.
She explained: “Interest rates are not expected to fall anywhere near as quickly as they were raised, and we are not expected to see a return to interest rates anywhere near as low as we saw in recent years so we aren’t expecting annuity incomes to return to the much lower levels they hit a few years back.”
“If you are thinking of annuitising then it’s important to do your research.
“Don’t just accept the first quote you are offered.
“Different providers offer different rates and taking the time to look across the market could leave you thousands of pounds better off over the course of your retirement.
“You can use an annuity search engine to get a sense of what is on offer.”
What factors influence annuity rates?
VARIOUS factors impact exactly how much income you get...
- Gilt yields: Annuity providers tend to fund them using returns from government bonds called gilts. The Government pays the annuity provider a fixed interest amount, tied to the Bank of England interest base rate. When the base rate rises, gilt yields also increase, subsequently boosting annuity rates, as observed in recent years.
- The value of your pension: The size of your pot is the primary factor determining your annuity income. The more savings you allocate to buy an annuity, the higher your income will be.
- Age and life expectancy: How long you are expected to live significantly influences the annuity rate you are offered. The more years this is, the lower your rate, as the provider will be paying you for a longer period. For example, a 60-year-old will typically receive a lower income than a 70-year-old.
- Your health: Poor health, smoking or being overweight can lead to a shorter life expectancy, which may qualify you for a better annuity rate. It is crucial to declare any health conditions to your provider.
- Your postcode: Annuity providers use your postcode to estimate life expectancy. If you reside in an area with a lower-than-average life expectancy, you may be offered a slightly higher rate.
Is an annuity right for you?
Annuities can be a good option for people who want the guarantee of an income for life.
They will pay you the same amount irrespective of what happens to interest rates and in the wider world.
But they are not right for people with complex health issues or a shorter life expectancy.
This is because the longer you live after taking out an annuity, the better the return you get on your initial investment.
For example, you could spend £100,000 on an annuity that pays £7,000 a year.
After 20 years you would have received a total of £140,000 — £40,000 more than you paid for the annuity.
But if you lived for just seven years after you had taken out the annuity, you would have been paid a total of £49,000.
This would be £51,000 less than you paid for the annuity.
As the annuity rate is fixed, they are not right for people who may need more income in the future.
Before you take out an annuity you should consider some of the pitfalls.
For example, if you die early then not all annuities will pay out to a loved one after you pass away.
Often, if you choose this kind of benefit, your provider will offer you a lower yearly annuity income.
Meanwhile, if you lock into an annuity and rates increase later then your income will not change.
If you buy an annuity, you can opt to take a quarter of your pension pot as a tax-free lump sum.
The rest is then converted into a taxable lifetime income.
Exactly how much an individual gets from an annuity depends on their personal circumstances, such as if they are in good health, their life expectancy and how much their pension is worth.
How can I get the best deal?
AS you get closer to retirement age, your pension provider will send you information about the value of your pension pot and the options available to you to take money from it.
Some providers can offer you an income directly.
But remember, you don’t have to take an annuity offered by your existing provider.
Buying an annuity is usually an irreversible decision so it’s crucial to consider your options, choose the right type and get the best deal you can.
Research by Hargreaves Lansdown revealed that the variation in rates offered by different providers could amount to thousands of pounds in retirement.
So shop around for your annuity – it almost always gives you a higher income in retirement.
Use tools such as the Money Helper’s annuity comparison tool, or use annuity brokers to find the best deals currently available on the market and tailored to your circumstances.
You can find a broker online but check reviews and fees.
Only non-advised providers will give you a quote without you taking advice first.
They will simply offer you the best rate they can find on the market.
There may be annuity providers offering higher rates via only a financial adviser.
If you are close to retirement and unsure about annuities or making the most of your pension pot, Pension Wise can help.
It’s a free service from government-backed financial guidance adviser, MoneyHelper.
To locate an independent financial adviser, you can visit unbiased.co.uk.
However, it’s important to note that their services will typically incur a fee.
You can also compare annuities yourself by visiting annuityready.com
What are the alternatives?
If you want more flexibility over your income you might want to consider a different approach.
Most retirees now opt to leave their pension invested in the stock market, and take income as and when they need it, via “drawdown”.
As with an annuity, you can withdraw a quarter as a tax-free lump sum, with the rest taxed as income.
Drawdown is more flexible than an annuity, and returns may be higher, but savings are exposed to greater volatility.
If there is a stock market crash, the fund value will fall, so your income needs may not be met.
If you are considering a draw-down, seek financial advice.
You are not limited to picking one option. You can mix and match.
So you could use some of your pot to buy an annuity and leave the rest invested to draw an income from it.