Figures from Hargreaves Lansdown, the investment platform, show that a 65-year-old with a £100,000 pension could use it to buy a guaranteed £7,425 annuity, up from £7,235 last week.
The change is due to turbulence in the bond market, with long-term gilt yields affecting annuity rates. When gilts, or Government bonds, fall in value, their yield rises and annuity rates rise too.
The Hargreaves Lansdown figures are based on an average 65-year-old buying a level annuity – meaning it doesn’t increase with inflation – with a five-year guarantee, just for their lifetime and not including a spouse.
Annuity value could rise
Helen Morrissey, Hargreaves Lansdown’s head of retirement analysis, said the recent volatility has given an “extra boost to a market that has already enjoyed a stellar year”. This time three years ago, a £100,000 pension pot would have bought an income of just over £5,000 on a similar basis.
She said that rates could rise further as turmoil continues, perhaps even reaching similar rates to those seen in the aftermath of Liz Truss’ mini Budget.
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“Annuities continue to provide great value, and we can expect to see interest in them continue to increase,” she said.
Notes of caution sounded
While annuities are a great way to provide an income for life, making it easier to plan for the future, Morrisey cautioned that those planning to buy these products should be very sure of what they are getting into.
“Once bought, an annuity cannot be unwound,” she explained.
Nick Flynn, retirement income director at annuity provider Canada Life, said that those wanting to buy an annuity should ensure they check all options available. Some people will benefit from specialist annuities, such as those for smokers or those in ill health, while others may want to consider family members when buying this income.
“It’s important to seek the advice of an annuity specialist or regulated financial adviser who will be able to help you find the best annuity product for you, with potentially wider benefits for your spouse or loved ones included too. Either way, be sure to shop around for the best option as opposed to accepting your existing insurer’s offer, as the decision to purchase an annuity is irreversible,” Flynn added.
A tiered approach
There is no longer any compulsion to buy an annuity with your pension at the time when you retire. Instead, you can choose to leave your pension pot invested, a process known as ‘drawdown’, or you can take it all out as cash.
However, this can leave you with a headache if you later run out of money and need it in later life.
Morrissey said that you do not have to use your entire pot to buy an annuity, and can make decisions on retirement income in stages.
“You don’t need to annuitise all your pensions at the same time if this doesn’t work for you. You can take a flexible approach and annuitise in stages throughout your retirement as your needs evolve. This means your remaining pot can remain invested in income drawdown, where it can grow while you get the potential to take advantage of higher annuity incomes,” said Morrissey.
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