Annuity rates have risen to their highest level in eight years, and there may be further increases to come that boost retirement income. 

Annuity rates are affected by various factors, including the yields on government bonds, known as gilts, which have sunk since the start of 2022, and interest rates. As interest rates, annuity rates are also expected to increase, pushing up the amount of income received from these products in retirement. 

The average income provided by an annuity bought by a 65-year-old with a £1,000 pension currently stands at £5,940 per year, which is a rise of around 28% since the start of the year. Rates have soared recently to reach their highest level since August 2014. 

The average annuity income for a 75-year-old rose by 18% from £6,697 to £7,905 since the start of the year, while a 60-year-old can expect to receive 27% more income, with an increase from £3,976 to 35,049. 

This is good news for people approaching retirement after annuity rates spent years falling, reaching their lowest point on record in August 2020. Then, annual income stood at just £3,842 for a 65-year old buying an annuity with a £100,000 pension, or around £2,000 less income than they would have received if they’d bought an annuity a decade earlier. Find out more about how annuities work in our article Annuities explained. 

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “The last time we saw rates this high was almost eight years ago and there’s every chance we will see incomes breach £6,000 in the coming weeks.

“After ruling the retirement market for many years annuities fell out of favour with the advent of Freedom and Choice as people embraced more flexible options such as income drawdown. However, the higher incomes available now could prompt more people to take a closer look.”

“The major criticism of annuities is around their flexibility. Once bought an annuity cannot be unwound and so people feel they miss out on the potential for higher rates later. However, there is no obligation to annuitise your whole pension on one day, you can annuitise in stages throughout your retirement. This enables you to secure a level of guaranteed income to secure your needs while leaving the remainder invested. It also means you can benefit from better rates as you age.”

Your options at retirement

Since the introduction of pension freedoms in April 2015, you can do as you wish with your defined contribution pension savings. At the time, many experts stated that this would see the demise of annuities, designed to be bought with a pension pot in order to receive an income in retirement. However, they have remained a popular choice, and particularly in uncertain times, with many retirees choosing to buy one with at least some of their pension savings to provide a secure income for life. 

You may choose, for example, to buy an annuity for some secure income while keeping the remainder of your pension invested and drawing an income from your pot. 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 offers people aged 50 and above with free guidance on their pension choices at retirement.

It’s worth using Pension Wise as a starting point, but if you want professional financial advice tailored to your particular situation, you’ll need to speak to a financial advisor. Find out more in our article How to find the right financial advisor for you.

If you’re considering getting financial advice and are looking for somewhere to start, Rest Less Pensions are offering a free Pension Health Check† with one of their experts. They can offer you information and guidance on the call and at the end will discuss whether you would benefit from paying for professional financial advice. Capital at risk.

If you’re considering getting financial advice and are looking for somewhere to start, Rest Less Pensions are offering a free Pension Health Check with one of their experts. They can offer you information and guidance on the call and at the end will discuss whether you would benefit from paying for professional financial advice. Capital at risk.

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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