Sales of annuities, which provide a guaranteed income for life, surged 22% during the first three months of 2023 according to the latest data from the Association of British Insurers – and high inflation and rising interest rates look set to continue the trend.

Annuity rates are strongly linked to interest rates, and the sharp rise in sales reflects the increase in interest rates seen over the past few months. Between January to March 2023, people bought 16,256 annuities. This is the largest number recorded since 17,252 were sold between July and September 2019.

Annuity premiums for the quarter totalled £1.2 billion: the highest value since 2015 when pensions freedoms were introduced which gave people more flexibility over how to access their retirement savings.

It does look though that, while inflation is helping to fuel sales in an uncertain economic environment, it is also encouraging caution amongst customers, who appear to be turning in greater numbers to products which protect them from inflation: sales of escalating annuities, which provide an income that increases every year, grew by 23%.

The bumper figures have also been bolstered by more people switching provider. For the first time since 2016, more than 10,000 people bought an annuity from a different provider to their pension savings provider, making up 64% of sales and totalling £847 million. In comparison, only 55% of sales were made by a different provider in the same period in 2022.

The latest Bank of England base rate hike announced at the end of May could spell further good news for people looking to secure a guaranteed income in retirement… with the possibility of more hikes in the pipeline as the Bank struggles to fulfil its remit of keeping down inflation.

Bond yields also on the rise

Annuity rates are also affected by, among other things, the yields on long-term government bonds – and these too have also risen sharply in the last few weeks.

Annuity rates have drifted down from the heights experienced in the immediate aftermath of the highly disruptive “mini” Budget, however they are still 19 per cent higher than this time last year (£5,691 for a £100,000 investment, age 65). Helen Morrissey, Head of Retirement Analysis at Hargreaves Lansdown, says, “There are no guarantees, but we could see these incomes boosted a bit more in the coming weeks.”

But is the buoyant market likely to continue? Morrissey adds: “While we’re likely to see interest in annuities persist for the foreseeable future, it’s not a guarantee. Annuity rates could be higher or lower in future. Annuities may not be the ‘retirement powerhouse’ they were before the advent of pension freedom and choice, but if a client is looking for a guaranteed income in retirement, then they should be considered.

Top tips for purchasing an annuity

Hargreaves Lansdown offer five tips for purchasing an annuity:

1) Get a quote on the open market

Different providers offer different rates and if you go with the first quote you are given you could be missing out on a higher income elsewhere. Using an annuity quote engine will give you an idea of the different rates on offer.

2) Include your health and lifestyle conditions

It may seem counterintuitive that you get more income if you admit to not so healthy habits around drinking or smoking. However, by giving your annuity provider your health and lifestyle details you could get an income boost. Weight, cholesterol levels, medication, conditions like diabetes or health events such as a stroke will be considered by annuity providers when assessing your quote.

3) Consider inflation protection

You could be retired for twenty years or more and so it could be worth getting an inflation linked annuity to help preserve your purchasing power. Going with a flat rate option means you get that amount for the rest of your life and what could be a decent income now may not look quite so generous as the years pass. However, you also need to balance this with the fact inflation linked products tend to have a much lower starting income and it can take years before you make up lost ground.

4) Don’t forget your spouse

If you are married or in a civil partnership, then you probably want to make sure your loved one continues to receive an income should you die before them. You can do this by purchasing a joint life annuity.

5) Buy in chunks

You are under no obligation to annuitise your entire pension pot at once – you can do it in stages throughout your retirement. This means you can secure your basic needs and leave the rest invested where it will hopefully grow over time. Added to this you are likely to get better rates from annuities as you age.

Keeping tabs on your retirement finances

Remember that you can use your RetireEasy LifePlan to make sure your retirement plans are realistic and sustainable.  If your subscription has lapsed, you can renew it for just a few pounds a month.