Annuity rates have edged upwards again, and are now just below the recent record high recorded in the wake of Liz Truss’s disastrous mini Budget.
Annuity rates have risen over the past 18 months year, as yields on government gilts have increased in response to the higher interest rate environment. Many had been expecting interest rates to start to come down, affecting annuity pricing, but these expectations appear to be changing in light of poorer economic data.
According to Hargreaves Lansdown a A 65-year-old with a £100,000 pension can currently secure a guaranteed income of £7,430 per year from an annuity. This is the highest since last October, and just a shade under the highs experienced in the aftermath of the mini-Budget.
In contrast at the start of 2022, a benchmark annuity with a £100,000 purchase value would have paid an income in the region of £4,540 a year for someone aged 65 with no health or lifestyle conditions to declare.
Hargreaves Lansdown head of retirement analysis Helen Morrissey said this upward momentum is welcome, given speculation on the future direction of rates after the Bank of England paused interest rate increases.
Canada Life ponts out that over a 20-year retirement an annuity bought at the start of January this year would deliver around £49,200 extra income a year, when compared to one sold at the start of 2022.
These higher annuity rates are fuelling demand for these retirement products. Canada Life recently reported record individual annuity sales of £1.2bn for last year.
Canada Life retirement income director Nick Flynn says: “The annuity market is incredibly busy, as clients seek to capitalise on the relatively high incomes currently on offer.
“Given where we’ve been in the recent past, this is clearly a positive story for the many customers seeking retirement income security.”
He says while it is impossible to second guess rate movements annuity rates are closely linked to the returns available on government bonds.
“While we continue to see inflation higher than the 2 per cent target rate set by the Government, the Bank of England will tread very carefully before considering reducing the base rate.
In fact, at the last MPC meeting, two of the members voted to increase base rate. So, on that basis, annuity rates are likely to remain at or near recent historical highs. However, wider market forces can change rates, for example, competition from providers who offer annuities in the open market seeking market share.”
Morrissey adds: “Annuities have had a rollercoaster ride in recent years, as soaring interest rates pushed incomes skyward. In the aftermath of the mini-Budget back in 2022, a 65-year-old with a £100,000 pension could get themselves up to £7,586 a year – the highest income seen since before the global financial crisis.”
She adds that as the BoE has held interest rates for the past seven months, annuities started to edge back, prompting speculation as to their future direction.
“The good news is that in recent months incomes have been quietly on the rise. Recent data from HL’s annuity search engine shows the same 65-year-old could now get up to £7,430 per year from their annuity – just a shade away from its post mini-Budget highs and the highest we’ve seen since last October.
“The market realised it over-egged how soon and how fast rates would fall, so are quietly planning for them to be slightly higher for longer than it previously expected.
Annuities continue to deliver the best value we’ve seen in years, and we can expect to see interest in them continue to grow from people looking to secure a guaranteed income in retirement.”
