Despite two base interest rate cuts from the Bank of England so far this year, annuity incomes are still riding high.
A 65-year-old with a £100,000 pension could get an income of up to £7,499 a year from a single life level annuity with a five-year guarantee.
This is well over £2,000 a year more than someone in the same position could’ve got just three years ago.
Remember, annuity quotes are only guaranteed for a limited time and will vary depending on individual circumstances.
This article isn’t advice. The government’s Pension Wise service can help if you’re over 50 and need guidance. You can also get personalised financial advice if you need it.
Why are annuity incomes rising?
Higher interest rates and rising long-term gilt yields have combined to boost general interest in annuities. In fact, recent data from the FCA showed a 38.7% increase in people looking to buy a guaranteed income through an annuity compared to last year.
However, interest rates have been slowly on the slide in the second half of this year, with the Bank of England cutting them back to 4.75% in November.
With likely further rate cuts lined up for next year, there’s potential for downward pressure on annuity incomes, but we’ve not seen this happen yet.
This is largely due to rising long-term gilt yields off the back of the recent 2024 Autumn Budget supporting incomes.
And the fact remains that annuities are still good value for most people, and we can expect interest to remain high.
Remember, pension and tax rules can change, and any benefits depend on your circumstances. You can't usually access money in a pension until you're 55 (rising to 57 in 2028). Investments can also rise and fall in value, so you could get back less than you invest.
What’s next for annuity rates?
While the Bank of England will no doubt cut interest rates further in 2025, it will likely take a considered approach to this. That means we probably won’t see them fall anywhere near as quickly as we saw them increase.
We’re also unlikely to see interest rates fall back to the historical lows we saw, so it could be more of a soft landing.
The important thing to remember is if you’re on the hunt for a guaranteed income in retirement, you should get quotes from across the market. That way you get the right product for your needs.
Different providers offer different rates. Opting for the first quote you get offered could leave you worse off in retirement, so using an annuity search engine is important.
It’s also important to consider whether you need an income that stays level throughout your retirement or rises with inflation.
You can buy inflation-linked annuities, but the starting income is much lower than what you’d get with a level product, and it can take years for it to catch up.
It's also worth saying that you also don’t need to limit yourself to either annuities or income drawdown – you can adopt both in your retirement planning.
You can use an annuity to secure your basic needs, alongside your State Pension and then keep the rest invested in drawdown that you can take from as needed.
You can then annuitise in slices throughout your retirement as your needs change.