Record-breaking annuity rates reach 16-year peak - is it the optimal moment to invest in an annuity?
Retirees are cashing in on record high annuity rates, with the over-65s snagging hefty incomes for their life-long pension pots. A 65-year-old with a £100,000 pension can rake in up to £7,639 a year, according to Hargreaves Lansdown – the highest amount since December 2008.
Annuities are insurance products that promise a regular income for the rest of your life, in exchange for a lump sum pension pot. They're closely linked to government bond yields, which surpassed 2008 levels in January, setting the stage for sought-after annuity income.
The rise in interest rates over the past few years has been a boon for annuity incomes, as Hargreaves Lansdown points out. In fact, the rate for a 65-year-old with a £100,000 pension hit £7,586 after the mini-Budget in 2022.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, hails this as "a reversal of fortune for a market that many thought had been all but killed off by a combination of rock-bottom interest rates and the Freedom and Choice reforms" in 2015. She goes on to predict that 2025 will continue to see a boom in annuity sales, with the Association of British Insurers (ABI) expecting sales to reach £7 billion.
2024 saw annuity sales jump 24%, hitting a 10-year high, according to the ABI. The most popular age to purchase an annuity remains 65, representing 20% of all sales. Six providers offer annuities to new customers, and last year 69% of annuity buyers switched to a different provider, compared to 64% in 2023.
Shopping around for an annuity can net you a better deal, as compared to staying with your current pension provider. Separate data from Standard Life reveals that annuity rates have increased by 8% over the past 12 months, resulting in a £500 yearly increase for a typical retiree with £100,000 in retirement savings, compared to if they bought it in January 2024. Over their whole retirement, a 65-year-old with typical life expectancy would rake in an extra £10,000 from their annuity.
Pete Cowell, head of annuities at Standard Life, says "Annuity rates have continued to improve, offering retirees even stronger total incomes." He further notes that stronger annuity rates and the looming inheritance tax liability for pension pots from 2027 may encourage wealthier savers to cash in on their pensions with annuities becoming an increasingly attractive option.
Annuity rates could take a tumble this year, especially if interest rates fall again. They dipped following two interest rate reductions last year but soared during the gilt turmoil in January. The base rate was chopped from 5.25% to 5% last August, down to 4.75% in November and an additional reduction to 4.5% last month.
However, even a potential annuity rate downturn might not dampen sales, given the upcoming April 2027 tax liability for pension pots. Experts suggest that many might opt to secure a guaranteed income with their pension instead of keeping it in drawdown for inheritance tax efficiency.
To get a solid grasp of the current annuity landscape, check out our outlook for annuity rates and tips for ensuring you secure the best possible deal.
The Annuity Market Outlook
The look for annuity rates this year centers on gilt yields, which influence the rates providers offer. Should yields rise or increase further, we may see an uptick in annuity rates. Conversely, if interest rates fall, gilt yields might follow suit, leading to reduced annuity rates.
Financial planner Holly Tomlinson from wealth manager Quilter notes that "A reduction in the base rate may lead to lower bond yields, potentially resulting in less favorable annuity rates for retirees." Meanwhile, Morrissey predicts that the Bank of England will not slash interest rates as swiftly as they raised them.
Lily Megson, policy director at financial adviser My Pension Expert, anticipates interest rates to continue falling this year, making it an auspicious time to lock in an annuity product.
Is an Annuity the Right Move for You?
Just because annuity rates currently represent good value doesn't necessarily mean it's the ideal retirement strategy for everyone. Using your pension pot to purchase an annuity is an irreversible action, so vigilant thought and potentially financial advice is essential beforehand. In 2024, more annuity purchases occurred after taking financial advice, with 36% of buyers seeking counsel beforehand compared to 29% in 2023.
Some might favor leaving their pension pot in drawdown, where they can keep part of their pot invested while withdrawing cash at their leisure. Pension drawdown is still the most popular option among retirees, with almost 280,000 opting for it in 2023/2024 as opposed to about 82,000 annuity purchases.
However, experts believe that with the liquidation of pension pots for inheritance tax starting in April 2027, retirees may reconsider their preference for drawdown in order to secure a guaranteed income through an annuity instead.
Lastly, remember that there are variations of annuities available on the market, such as inflation-linked annuities and joint-life annuities, which can provide ongoing income to a beneficiary. You can purchase an annuity at any stage in retirement, with older retirees typically securing higher rates due to shorter life expectancy.
Navigating the annuity market requires careful deliberation and an understanding of key factors affecting rates. Weigh the pros and cons, shop around for the best offers, and consult a financial advisor if needed to make an informed decision that fits your needs and retirement goals.
- Retirees might consider investing in various financial products such as bonds to supplement their annuity incomes, as annuity rates are closely linked to government bond yields.
- For those with savings, shopping around for the best annuity rates could result in thousands of pounds in additional income over the course of retirement, according to Standard Life data.
- Despite a potential drop in annuity rates this year due to falling interest rates, financial experts predict that retirees may still opt to secure guaranteed income with their pensions, given the upcoming inheritance tax liability for pension pots starting in 2027.
