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 guaranteed incomes 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 a payment of £4,700 per year.
But over the past two years, annuity rates rose in line with the Bank of England’s increases in interest rates.
This means that in November 2023, 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. This now stands at 5.25 per cent and has been held at this level for six consecutive meetings.
Experts have warned that 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, and the rate is set to decline later this summer or in autumn.
Economists polled by i this week said that a cut in August was the most likely option, though one could take place as soon as June.
“If the Bank of England base rate forecasts come to fruition, we are likely to start to see annuity rates decline in parallel. If someone is considering purchasing an annuity in the near future, it may well be prudent to obtain annuity 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 a along 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 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 get a pension annuity?
Whether an annuity is the right product for you, and exactly how valuable it will be, depends on your circumstances, including your health.
They are also not the only way to access your pension if that is your main reason 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. However, purchasing an annuity is an irreversible decision, with this in mind careful consideration should be given,” said Mr Ormston.
“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,” he added.
Experts warn 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 decisions. These professionals will help guide you through the myriad 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,” said Mr Flynn.
