Annuities offer the security of a guaranteed income for life, no matter how long you live, and sales have rebounded sharply as rising interest rates boost returns. But the trend is set to go into reverse.
The Bank of England cut interest rates from 5.25% to 5% on August 1 and may cut once or twice more this year. If it does, annuity rates will slide.
Experts are urging pensioners interested in buying an annuity to act sooner rather than later, to take advantage of today’s higher rates.
Today, a 65-year-old can still get a level lifetime income of more than £7,000 a year from a single life annuity. When interest rates were slashed almost to zero after the financial crisis, they got as little as £4,500.
Sales collapsed when the obligation to buy an annuity at retirement was scrapped in 2015’s pension freedom reforms, but have picked up lately with sales up 46% to £5.2 billion in 2023.
Tha’ts the biggest total since 2014, according to the Association of British Insurers. Sales have spiked again this year as retirees race to lock in before rates fall.
Most retirees now prefer to leave their pension to grow via drawdown, taking income as required, but Pete Cowell, head of annuities at insurer Standard Life, said: “Others see the benefits of having a guaranteed annuity as it provides an element of certainty.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said rising interest rates “ushered in a golden era for annuities as income soared” but they continue to offer good value.
For those considering an annuity, she says there are five things to consider.
Take your time. The BoE may cut interest rates but not as fast as it increased them. “Falls will be gradual so do not feel pressurised into making a snap decision. You need to think it through”
Once bought an annuity cannot be unwound. It’s yours for life so you need to consider every relevant factor before making your decision.
You don’t have to annuitise all at once. You could use some of your pot to buy an annuity, and leave the rest invested via drawdown, Morrissey said. “Annuitising in stages will enable you to benefit from higher annuity rates as you age.”
Check the whole market. You are not obliged to buy an annuity from your pension company, if it offers one. Instead, search the market and compare rates, as you could get hundreds of pounds more every year by shopping around. “Over the course of your retirement, this could add up to thousands in extra income.”
Consider every option. Do not just go for the highest income you can get. First, decide whether you need a single life or a joint life annuity to protect your partner.
Morrissey said: “A 65-year-old with a £100,000 can still get up to £7,104 per year from a level single life pension but if they were to die their spouse could be left with nothing.”
A joint life annuity pays up to £6,493 a year. “That’s lower but if you pre-decease your spouse they would continue to get an income.”
The average annuity purchaser lives for another 20 years. It may be worth considering an annuity an escalating annuity where the income rises every year, although this means you get less at first.
Be honest about your health.
People in poor health actually get more income from an annuity because their life expectancy is lower. This means the provider probably won’t have to pay out for as long, Morrissey said. “A stroke could push your income above £8,400 a year while someone who smokes 10 cigarettes a day could receive more than £7,600.”
This is a complicated decision so decent research online first, talk to your partner and consider taking independent financial advice.
