Earlier this year, we reported that rising interest rates had made annuity rates considerably more attractive, and these could rise further if interest rates continue to increase ('A new dawn for annuities?', IC, 5 August 2022). Two months on, this is very much the case, not only because interest rates have risen but also because gilt (UK government bond) yields have risen due to concerns about the UK's financial health after last month’s mini-Budget. Annuity rates are set according to the levels of these, as well as personal factors such as your age and health.
For example, taking some of the top annuity rates available as of 29 September, a 65-year-old could purchase a single life, level, five-year guaranteed annuity that pays an annual income of £6,994 for £100,000, according to Hargreaves Lansdown. This is up from an annual income of £4,989 a year ago. If you are older, the top rates are even higher: at age 75, £100,000 could buy a single life, level, five-year guaranteed annuity tha pays an annual income of £9,108.
| Annual annuity income from a £100,000 pension | ||||||
|---|---|---|---|---|---|---|
| Type of annuity | Age 55 | Age 60 | Age 65 | Age 65 smoker* | Age 70 | Age 75 |
| Single life, level, no guarantee | £5,703 | £6,234 | £7,046 | £7,700 | £7,926 | £9,326 |
| Single life, level, 5 year guarantee | £5,692 | £6,215 | £6,994 | £7,652 | £7,830 | £9,108 |
| Single life, RPI, 5 year guarantee | £2,774 | £3,258 | £3,978 | £4,696 | £4,864 | £6,171 |
| Single life, 3% escalation, 5 year guarantee | £3,582 | £4,087 | £4,854 | £5,495 | £5,677 | £6,942 |
| Joint life 50%, level, no guarantee | £5,402 | £5,778 | £6,373 | £6,777 | £7,230 | £8,202 |
| Joint life 50%, 3% escalation, no guarantee | £3,328 | £3,729 | £4,307 | £4,799 | £5,082 | £6,102 |
| Source: Hargreaves Lansdown, 29.09.22. Quotes based on an average postcode and paid monthly in advance. Joint life quotes assume spouse is three years younger than the annuity purchaser | ||||||
| *Smoker annuity based on a 65-year-old who has smoked 10 cigarettes a day for the past 20 years and drinks 15 units of alcohol a week. | ||||||
If you have decided that an annuity is going to form a part of your retirement income, you may be wondering whether to buy now or wait a few months to see if annuity rates get even better.
Buying an annuity now rather than waiting could mean locking in a higher rate than in the recent past and, if interest and gilt rates fall, better than what you might be able to get in future.
Equities had been on an upward trajectory until 2020, boosting the value of drawdown pension pots invested in the market. But since 2020, markets have been more volatile, meaning that drawing from a drawdown pension pot could deplete its value even further. And with uncertainty over how reliable your retirement pot will be, a guaranteed income for life from an annuity could be attractive if you want financial security. "Pension savers have begun to see the rockier side of drawdown as market volatility has hit fund values and made taking an income from investments without running down their pot a tricky business," says Gary Smith, financial planning director at Evelyn Partners.
Canada Life reports that average annuity rates have increased by 52 per cent in the past nine months, as of 30 September. This means the break-even point – the time after which you would recoup the value of the amount you spent on the annuity – has reduced from 22 to 15 years.
Nick Flynn, retirement income director at Canada Life, adds: "Gilt yields have fallen back slightly over the past few days but, with annuity rates at a 14-year high, using some of your fund to lock in [annuity rates] now makes sense. You can then decide what to do with the balance in future months or years while it remains invested."
Kay Ingram, chartered financial planner, argues that while rising gilt yields mean now is a good time to consider buying an annuity, further interest rate rises are expected in the coming months so annuities could be even better value then. "Whether to delay a purchase depends on where the money is coming from," she says. "If the [money for the annuity] purchase is already in cash, buying now or in the next month could provide good value. However, if your pension funds are invested in fixed interest or equities it may pay to wait for [their] prices to recover from recent downturns before cashing out."
Smith adds that you "might not want to crystallise losses by selling a lot of investments to raise the cash for an annuity. [This shows] the wisdom of gradually building up a cash or cash equivalent reserve in your pension well before retirement."
Michael Lapham, director of financial planning at Mercer & Hole, argues that if you definitely need an annuity you should buy one at the point you need the income – not before or after.
He adds: "Expected near future economic conditions [may be] already factored into current annuity rates and the coming months may not see significant further increases. However, there may be no harm in deferring an annuity purchase to see if there are any short-term increases. [But] this is contingent on having sufficient capital to meet [your] needs until a regular income stream is provided by an annuity purchase. This capital could be either existing cash or provided by drawing tax-free cash from your pension fund."
Smith, meanwhile, says that a key consideration on whether to buy an annuity now is whether you can get one at a rate that provides you with the level of income you need. Even with rate rises, annuities might not provide a sufficient income for you, so you could defer buying one for a number of years because annuity rates get better as you get older. "You should not base your decision on whether to buy an annuity on whether you think rates might move higher in the next six months," he adds.
