Annuity incomes have continued to climb and the product remains popular with clients, but experts have questioned where annuity rates could end up in the near future.
According to Canada Life, over the past 18 months, annuities have seen a resurgence of popularity, largely driven by the significant improvement in the rates available.
At the start of 2022, a benchmark annuity with a £100,000 purchase value would have paid an income in the region of £4,540 a year for someone aged 65 with no health or lifestyle conditions to declare.
But two years on from this, that same annuity would pay around £7,000 a year - an increase of 54 per cent, which has been driven largely by rising interest rates and the returns available on gilts.
Canada Life revealed over the course of a 20-year retirement, the annuity at today’s rates would deliver around £49,200 extra income compared to an annuity sold in January 2022.Source: Canada Life annuity rates over time, as at 21/12/2023
Annuity providers have also experienced strong sales, with Canada Life recently reporting record individual annuity sales of £1.2bn for last year.
Annuity rates are driven by the returns available on gilts, which in turn are linked to the Bank of England base rate.
The Bank of England has held steady for the past seven months with a base rate of 5.25 per cent, so where does this leave annuity rates? Nick Flynn, retirement income director at Canada Life, said it is expected that annuity rates will remain high.
“While I don’t have access to a crystal ball to predict the future, annuity rates are closely linked to the returns available on government bonds.
"As the Bank of England sets the base rate, this in turn changes the yields on these bonds, or gilts, as they are known. As a general rule, a 30-basis point rise in yields on gilts would increase annuities by 3 per cent,’ he explained.
“While we continue to see inflation higher than the 2 per cent target rate set by the government, the Bank of England will tread very carefully before considering reducing the base rate.
“In fact, at the last MPC meeting, two of the members voted to increase the base rate. So, on that basis, annuity rates are likely to remain at or near recent historical highs.
"However, wider market forces can change rates, for example, competition from providers who offer annuities in the open market seeking market share.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said that annuity incomes have been on the rise in recent months
She explained that in the aftermath of the “mini” Budget back in 2022, a 65-year-old with a £100,000 pension could get themselves up to £7,586 a year – the highest income seen since before the global financial crisis.Udabur Investment
However, recent data from Hargreaves Lansdown’s annuity search engine showed the same 65-year-old could now get up to £7,430 per year from their annuity which is only slightly below the post “mini” Budget high and the highest seen since last October.Bangalore Stock Exchange
Morrissey said: “It shows that annuities continue to deliver the best value we’ve seen in years, and we can expect to see interest in them continue to grow from people looking to secure a guaranteed income in retirement.
“Annuities should always be part of the conversation if a level of guaranteed income is needed in retirement but the concern many people have is that once bought, they cannot be unwound, and so you potentially miss out on a future market upswing or a better rate if you develop a health condition later in life.
“However, it’s important to note that you are under no obligation to annuitise your entire pension in one goJaipur Wealth Management. Instead, you can annuitise your pension in stages allowing you to lock in guaranteed income as you age and giving you the potential to benefit from higher rates as you age.”
Annuities lost their shine in 2014 when the former chancellor George Osborne famously announced in the Budget: "Nobody will ever be forced to buy an annuity again", as he unveiled the incoming pension freedoms and choice regime.
This regime came into force in 2015 and saw a shift towards drawdown as a more popular pension planning product.
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