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Oct 14

Annuity rates up 44% in a year. Is now a good time to buy one?

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With gilt yields soaring, annuity prices have risen 44% in the space of 12 months. So if you’re nearing retirement age, is now the time to buy a guaranteed income for life? Let’s take a look.

Keep on reading for all the details or click on a link to head straight to a section…

what is an annuity?

Buy an annuity from an insurance company and you’ll receive a guaranteed income for retirement.

Depending on the type of annuity, this income may be paid to you until you die (lifetime annuity), or for a set period of time (fixed-term annuity). Annuity income is taxable.

Importantly, you don’t have to use all of your pension pot to buy an annuity. For example, you can withdraw 25% of your pension pot tax-free. You can then buy an annuity with the rest (or some) of your remaining pot.

Unsurprisingly, the level of guaranteed income for your retirement will depend on a number of factors, such as your age, and your health.

The types of annuity

The are four main types of annuities that you can buy. These include:

    • Lifetime. These are a popular option for risk-averse retirees. That’s because a lifetime annuity is paid until death, so there’s no uncertainty surrounding how much of an income you’ll have to live on in retirement.  The drawback of these annuities is that if you die early, you may receive less than you paid in. However, if this happens, some providers may allow you to nominate a loved one to receive a lump-sum.
    • Fixed/short-term. As its name suggests, a fixed/short-term annuity is paid to you in retirement for a set period of time. Typically the term is five to ten years. As well as receiving a fixed income for a set period of time, you’ll typically receive a ‘maturity payment’ when the term comes to an end.
    • Investment-linked. Think about an investment-linked annuity as a bit of a hybrid product. That’s because with an investment-linked annuity, part of it pays a guaranteed income. The other part is linked to investment performance. So, if the stock market rallies during your retirement, you’ll be quids in. Obviously if the opposite happens and stocks slide, your retirement income will take a hit.
    • Impaired life. If you’ve health issues, or you’ve been diagnosed with an illness, you may be able to purchase an ‘impaired life’ annuity. These annuities typically pay higher retirement incomes than other types, as holders are likely to have a lower life expectancy.

Annuities are complex products, and there are other types available, such as ‘level,’ ‘escalating’ and ‘inflation-linked’ annuities. To learn more about these, take a look at our comprehensive annuity rates explained article.

Why have annuities lost their shine in recent years?

It’s fair to say that annuities have lost their shine in recent years. This is mostly because rates have been at rock-bottom levels. After all, sacrificing a lifetime of pension earnings to buy an annuity that pays a pitiful sum may not seem the wisest of choices.

Another reason why annuities have lost their shine can be attributed to changes made to pension rules in 2015.

pension freedoms

‘Pension Freedoms’, as it was called by then-Chancellor, George Osborne, gave individuals the power to access their private, defined contribution, pension early. In other words, the changes made it possible to withdraw every penny from a private pension pot at age 55 – though only 25% could be taken as a tax-free lump sum.

For those reluctant to withdraw all of their pension, the changes also enabled pension holders to withdraw part of their pension, and keep the rest invested. This is known as ‘income drawdown.’

Crucially, the launch of Pension Freedoms also meant some pension schemes no long had to buy an annuity at all. This is another reason why annuities have become less popular over the past half-decade.

why are rates now rising?

While buying an annuity is no longer the go-to for a lot of pension holders, it’s worth knowing that annuity rates have soared this year. This is mainly down to UK gilt yields rising a lot over the past few weeks, especially after the Chancellor’s recent mini-budget.

Whatever your thoughts on Kwasi Kwarteng’s economic thinking, it’s a fact that the markets are concerned the Government can’t afford its spending commitments.

While rising yields is bad for holders of Government bonds (see our ‘Why do bond prices fall when yields rise?‘ article to learn more about this), rising yields is good for annuity rates.

rates have soared in 2022

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown explains just how much rates have risen in 2022: “Annuity rates are up an incredible 44% in the past year. The potential income for someone aged 65 with a £100,000 pension has risen by £200 in the past week alone. In recent years they’ve become also-rans of the retirement income market, but these rises should put them in contention again.”

Morrissey goes on to explain that buying an annuity can be attractive for those looking to secure a guaranteed income in their later years. She also highlights the benefits of buying an annuity in stages.

She explains: “Being able to guarantee at least a chunk of your income in retirement is invaluable, and annuities can play a sensible role here alongside the state pension and any defined benefit payments, so they should always be a consideration.

“Some retirees are dissuaded because once you’ve bought an annuity, the rate is locked in forever, so those sitting on lower rates from last year can’t benefit from more recent rises. However, it’s always worth bearing in mind that you don’t need to lock an annuity in with your entire pension pot all at once. One sensible approach is to do it with chunks of your pension in stages, securing income to meet your needs, as and when it makes sense for you.”

How to buy an annuity

Even if you only part with a proportion of your private pension, buying an annuity is a BIG decision. It’s also non-reversible.

However, if rising rates have piqued your interest, it’s worth knowing that annuity products can vary massively between providers. This is why obtaining several quotes is very important. In other words, don’t just automatically go with your existing pension provider.

To learn more about retirement planning, take a look at our article: are pensions worth it?

DisclaimerMoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. 


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4 months ago

think I’m going to stick with elect with a pension plan after reading this

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