Annuity rates have risen to their highest level in two years, and there may be further increases to come that boost the income they provide in retirement if interest rates rise.

The average income provided by an annuity bought by a 65-year-old with a £100,000 pension pot currently stands at about £5,099, compared to £5,000 in October 2019, according to research by investment platform Hargreaves Lansdown.

Annuity rates are driven by a number of factors, including the yields on government bonds, known as gilts, which have reduced since the financial crisis, and interest rates. If interest rates gradually increase from all-time lows as predicted, then annuity rates are also expected to rise over the coming year.
This is welcome news for prospective retirees given that annuity rates have been falling in recent years, sinking to their lowest point on record in August 2020 when annual payouts stood at just £3,842 for a 65-year old buying an annuity with a pension pot of £100,000 – around £2,000 less income a year than they could have achieved if they’d bought an annuity a decade earlier. Find out more about how annuities work in our article Annuities explained.

Helen Morrissey, senior pension and retirement analyst at Hargreaves Lansdown: “If the Bank of England chooses to raise interest rates this could give annuities a much-needed further boost towards the end of the year. At a time when pensioners missed out on an inflation busting state pension increase this extra income is particularly welcome.”

“While the increases we’ve seen lately may only seem small – an extra £99 per year for a 65-year-old with a £100,000 pot – over the course of a retirement this extra cash mounts up.”

“Those who decide to annuitise later get even more benefit, with a 70-year-old getting an extra £102 per year and a 75-year-old getting an extra £157. Including more information around your health and lifestyle will likely result in further increases in income.”

Annuities remain a popular choice at retirement

You can do as you wish with your defined contribution pension savings at retirement, following the introduction of pension freedoms in April 2015. Many experts predicted that this would see the end of annuities, as people were no longer compelled to buy them at retirement.

However, Alistair McQueen, head of savings and retirement at Aviva, says: “Annuities are alive and kicking, with about 75,000 people taking advantage every year.”

“The world is an increasingly uncertain place. In the past decade we have experienced two ‘one-in-one-hundred year’ events – a global financial crisis and a global pandemic. In uncertain times the attraction of a certain income for life, via an annuity, is understandable, valid and strong. And the freedoms allow annuities to be used in conjunction with the other means of taking an income in retirement.”

You may choose, for example, to combine an annuity for some secure income while keeping the remainder of your pension invested and drawing an income from your pot. This way, you keep your pension options open, and if annuity rates rise in the future you could buy another annuity if you wish for a better deal with another portion of your pension. Find out more about your options in our article Your pension options at retirement.

Where to seek help

If you are unsure how to manage your pension savings, the Government’s Pension Wise service, run by the Pensions Advisory Service and Citizens Advice, provides people aged 50 and above with free guidance on their pension choices at retirement.

It’s always worth taking advantage of a free appointment with Pension Wise. But if you want professional financial advice, you’ll need to speak to a financial advisor, as Pension Wise can only provide general guidance and not individual recommendations. Find out more in our articles How to find the right financial advisor for you might be helpful.

Alternatively, if you’re considering getting professional financial advice, VouchedFor* is offering Rest Less members a free pension check* with a local advisor. There’s no obligation but once you’ve had your review, the advisor will discuss the potential for an ongoing paid relationship if you think it might be useful to you.

Have you bought an annuity with your pension, or are you considering doing so? Or have you chosen one or more different options for producing a retirement income? We’d be interested to hear from you. You can join the conversation on the Community forum or post a comment below.

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