Pension annuity rates rise 44% – Britons urged to rethink option

Martin Lewis compares pension annuity against drawdown

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With an annuity, people hand over a lump sum and then are provided with a regular guaranteed income in retirement. However, previous low interest rates meant people parted with a lot of money and saw little in return.

Recent rises in interest rates have caused bond yields to rise and this has led to an increase in the rates offered on annuities.

New figures out this week showed that annuity rates have leapt by 44 percent in the space of a year and are now at their highest levels since early 2009.

It means someone aged 65 with a £100,000 pension pot could now get an annuity income of £7,191 a year – up from £4,989 in October last year, according to the investment platform Hargreaves Lansdown.

Emma-Lou Montgomery at Fidelity International spoke exclusively with about annuities and whether pension savers should consider this an option for their retirement.

Annuities fell out of favour in the era of pension freedoms and is often overlooked by most. However, it may be time for a rethink.

Pension freedoms have given people the opportunity to go on investing into their retirement, and in many cases, this will give them a higher standard of living than buying an annuity as soon as they retire.

But she explained that when interest rates go up, then annuity rates do as well. The expert said locking in a rate now could give people “much-needed certainty”.

Current annuity rate examples of annual income bought with £100,000:

  • Single life annuity with no annual increases – £7,448
  • Single life annuity increasing in line with RPI inflation- £4,143

(Annuity rates as of 05.10.2022 based on a male, aged over 65 in good health)

Weigh up the positives

Ms Montgomery said: “There are plenty of perks that come with deciding to buy an annuity. A lifetime annuity will mean that you’ll never run out of money, even if you live to the grand age of 100 and on.

“You also benefit from having a stable income which should help with budgeting, as you’ll know exactly how much money you’ll have coming in every single month.

“And with some types of annuities, you can also protect yourself against higher levels of inflation with products that increase the amount paid to you in income, as inflation rises.”

However, she warned of the downsides that come with annuities such as all one’s money being tied up without access.

She suggested that people worried about this can opt to buy an annuity with just some of their pension savings, keeping the rest of their pension pot intact, so they can dip in and out of it as they choose to.

Ms Montgomery continued: “You need to consider the potential drawbacks. A lifetime annuity also means the rate you buy at, stays with you for life.

“You won’t benefit from potential increases in the future, but equally you won’t feel a hit from falls in annuity rates.

“Some people prefer to opt for a fixed-term annuity, which offers a bit more flexibility as it only locks you in for a certain amount of time.

“The final thing to be aware of is that in some cases, you’ll receive less income than you would from pension drawdown.

“Pensions are invested and this means that if the markets do well, your pension and the amount you can draw from it will increase in value.

“And if you buy an annuity and pass away sooner than the annuity provider projected, you will have received less money and in most cases, annuities are treated differently to pensions when it comes to inheritance tax.

“It’s worth seeking the help of an expert on this if you are thinking about whether an annuity might be right for you.”

Ms Montgomery stressed that annuities are not all about interest rates.

She explained that while annuities go up when interest rates do, they aren’t the only factor that impact the level of income someone will receive and shouldn’t sway their decision completely.

Age, gender, health and choices like whether to opt for inflation protection, will affect how much their money gets them, quite considerably.

“There is no set rate on any annuity; two people of the same age, with the same fund value can be offered completely different annuity rates,” she concluded.

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