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 rise (“A new dawn for annuities ?”, IC, August 5, 2022). Two months later that is very much the case, not only because interest rates have risen, but also because yields on gilts (UK government bonds) have risen on health concerns. financial situation in the UK after last month’s mini-budget. Annuity rates are set based on annuity levels, as well as personal factors such as your age and health.
For example, taking some of the highest annuity rates available on September 29, a 65-year-old could buy a single, level, five-year guaranteed life annuity that pays an annual income of £6,994 per £100,000, according to Hargreaves Lansdown. This is an increase from an annual income of £4,989 a year ago. If you’re older, the top rates are even higher: At age 75, £100,000 could buy a single-life, leveled, five-year guaranteed annuity that pays an annual income of £9,108.
|Annual annuity income from a £100,000 pension|
|Type of annuity||55 years||60 years||65 years||65-year-old smoker*||70 years||75 years old|
|Single life, level, without guarantee||£5,703||£6,234||£7,046||£7,700||£7,926||£9,326|
|Single life, level, 5 year warranty||£5,692||£6,215||£6,994||£7,652||£7,830||£9,108|
|Single life, RPI, 5 year warranty||£2,774||£3,258||£3,978||£4,696||£4,864||£6,171|
|Single life, 3% escalation, 5 year warranty||£3,582||£4,087||£4,854||£5,495||£5,677||£6,942|
|Joint life 50%, level, without guarantee||£5,402||£5,778||£6,373||£6,777||£7,230||£8,202|
|Joint life 50%, escalation 3%, 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 zip code and paid monthly in advance. Joint life quotes assume the spouse is three years younger than the annuity buyer|
|* Smoker’s pension based on a 65 year old who has smoked 10 cigarettes a day for 20 years and drinks 15 units of alcohol a week.|
If you’ve decided that an annuity will be part of your retirement income, you may be wondering whether to buy now or wait a few months to see if annuity rates improve further.
Buying an annuity now rather than waiting could mean locking in a higher rate than in the recent past and, if interest rates and gilts drop, better than you could get in the future.
Stocks had been on an upward trajectory through 2020, increasing the value of market-invested drawdown pension pots. But since 2020, markets have been more volatile, which means shooting a pullback retirement pot could deplete its value even more. And with uncertainty about the reliability of your retirement kitty, a lifetime guaranteed income from an annuity could be attractive if you’re looking for financial security. “Savers began to see the more difficult side of the decline as market volatility affected fund values and made earning income from investments without depleting their kitty a tricky business,” says Gary Smith, director of financial planning at Evelyn Partners.
Canada Life reports that average annuity rates have risen 52% in the past nine months, as of September 30. This means that the break-even point – the time after which you would recoup the value of the amount you spent on the annuity – has been reduced from 22 to 15 years.
Nick Flynn, Director of Retirement Income at Canada Life, adds, “Government yields have fallen slightly over the past few days, but with annuity rates at a 14-year high, you’re using a part of your fund to block [annuity rates] now makes sense. You can then decide what to do with the balance in the months or years to come while it remains invested.”
Certified Financial Planner Kay Ingram says that while rising gilt yields mean now is a good time to consider buying an annuity, further interest rate hikes are expected in the coming months, so that annuities could then be even more attractive. “Delaying a purchase depends on where the money is coming from,” she says. “If the [money for the annuity] the purchase is already cash, buying now or in the next month could offer good value. However, if your pension funds are invested in fixed interest or stocks, it may be beneficial to wait [their] prices to recover from recent declines before cashing in. »
Smith adds that you “may not want to crystallize losses by selling a lot of investments to raise the funds needed for an annuity. [This shows] the wisdom of gradually building up a reserve of cash or cash equivalent in your pension well before retirement.”
Michael Lapham, director of financial planning at Mercer & Hole, says if you really need an annuity, you should buy one when you need the income, not before or after.
He adds: “Expected future economic conditions [may be] already factored into current annuity rates and the coming months may not see any further significant increases. However, it may not hurt to put off buying an annuity to see if there are any short-term increases. [But] it depends on having sufficient capital to meet [your] needs until a steady stream of income is provided by the purchase of an annuity. This capital can either be existing cash or be provided by withdrawing tax-free cash from your pension fund.
Smith, meanwhile, says a key consideration for buying 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 increases, annuities may not provide you with enough income, so you may want to put off buying an annuity for several years, as annuity rates improve with age. “You shouldn’t base your decision on whether or not to buy an annuity on the fact that you think rates may go up over the next six months,” he adds.