Annuities were once the most popular route for retiring investors, with some 90% plumping for an annuity as a home for their pension pot… until pension freedoms brought in the prospect of higher returns than what was being offered at the time.
Currently only about 10% of savers look to annuities. But the stresses in the economy have now pushed annuity rates to their highest point in over a decade… so will that persuade more retirees to review their options?
According to Hargreaves Lansdown, rates have risen by 35% over the past year and someone aged 65 with a £100,000 pension can now get an annuity income of £6,637 per year (single life, level, five-year guarantee). Last September they would only have been quoted around £4,900 per year.
Annuity rates are determined by long-term gilt yields which are affected by many factors – including interest rates: they had been in decline since the Global Financial Crisis and hit an all-time low in the aftermath of the Brexit vote. In fact, the last time annuity rates were this high was March 2010 when a 65-year old male could get £6,678.
The latest hike in the Bank of England interest rate to 2.25% could further impact upon this.
According to Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown: “Annuities once ruled the roost in retirement income but the low rates on offer meant they faced criticism that they offered poor value for money. These rising rates could encourage people who wouldn’t have thought of purchasing an annuity this time last year to give them serious consideration.
“Many people will have a need for some level of guaranteed income during retirement and so annuities should always form a part of any retirement income conversation. Once an annuity is bought it cannot be unwound and this can concern would-be annuitants who don’t want to lock into a rate that then subsequently rises.
“However, you are under no obligation to annuitise your pension in one go. A good approach could be to annuitise in stages, securing income to meet your needs as you need it. This gives you the opportunity to secure higher rates as you age, and you may also qualify for a further boost to your income through an enhanced annuity if you develop a medical condition at a later point. It also gives you the chance to keep the remainder of your pension invested for longer where it can hopefully benefit from investment growth.”
For savers, the choice between annuities and other investments could also be affected by the prospect of future inflation on their income. Even inflation at a few per cent each year can eat into the value of the income generated over a 10 or 20 year-period, and building an allowance for inflation will considerably impact on initial returns.
According to MoneyHelper, at 2% inflation an annual income of £5,970 would only be worth £4,900 in 10 years’ time, and £4,020 in 20 years’ time. And, with the prospect of high inflation over the next couple of years, for an annuity that rises in line with inflation a 65-year-old with a £100,000 pension pot would get a starting annuity of just 3.2%.
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