Annuity rates have hit a 17 year high as experts say now is one of the best times to lock in a deal.
Once written off as old-fashioned, annuities are back in favour, with record numbers of retirees revisiting the products – which offer a guaranteed income in retirement – as higher interest rates improve the deals available.
The very best annuity rates were seen in early summer and have edged lower since. However, aside from that peak, they remain higher than at any point in the past 17 years.
Who qualifies for the best annuity rates
Annuities allow pensioners to buy a set annual income for life in return for their pension pot.
People with health conditions such as high blood pressure or diabetes can qualify for enhanced annuity rates – in some cases above 9 per cent – making guaranteed income far more attractive for those with shorter life expectancies.
However they are still proving popular for those in good health.
Andrew King, pensions technical specialist at Evelyn Partners, said that recent market volatility, particularly around the Covid era and 2022 turmoil, has pushed more retirees towards the security of an annuity.
Annuity rates have climbed over the past three years because they track yields on long-dated Government bonds.
Gilt yields – the amount an investor gets for holding a government bond – are a key determinant.
Annuity providers typically buy government bonds to generate returns and high interest rates push these returns up.
So when interest rates are higher, annuity rates have also tended to be higher.
Currently, the Bank of England’s base rate is sat at 4 per cent but it could fall next week (18 December) when the Monetary Policy Committee (MPC) meet.
If they do decide to cut interest rates, most likely by 0.25 percentage points, this could have an impact on annuity rates.
Choosing the right type of annuity
Choosing the right type of product is crucial, warned former pensions minister Ros Altmann.
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Speaking to The i Paper, she said many people who bought basic single-life, level annuities – which do not rise with inflation and do not pay out to dependents after death – have seen the real value of their income eroded.
“It’s not just the rate that matters, but the type of annuity you choose,” she said. “That can make a huge difference to long-term outcomes.”
There is now a growing range of options, including impaired-life annuities for people with health conditions, fixed-term annuities for those who do not want to lock in for life, and escalating annuities that start lower but rise each year to protect against inflation.
Altmann warned: “Annuities are complex products and shouldn’t be bought or sold carelessly. Ideally, people should get advice from a financial adviser.”
It is no longer a straight choice between annuities and drawdown. Many retirees are using a mix – locking in part of their pot as guaranteed income while leaving the rest invested, or using drawdown early in retirement and buying an annuity later in life.
King said recent inheritance tax (IHT) changes announced in the 2024 Budget – which will bring unused pension assets into estates – could also be accelerating interest.
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“Money used to buy an annuity is immediately outside the estate and won’t be subject to IHT from April 2027,” he said.
He warned that while headline rates look attractive, adding features such as inflation protection, guaranteed periods or death benefits reduces the income offered.
“People need to understand that these valuable add-ons come at the cost of a lower starting income,” he said.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said the latest data from the firm’s annuity search portal shows a 65 year old with £100,000 can get up to £7,661 per year from a single life level annuity with a five-year guarantee.
She said: “It’s really important to do your research. If you are married for instance you may want to consider a joint life annuity rather than a single life one.
“You may also consider an inflation linked annuity that rises every year over a level one where the income remains the same. However, you will need to consider the fact that the inflation linked product will take several years before the income reaches the same level as a level one.
“It’s also important to say you don’t have to annuitise your entire pension at once. Instead you can annuitise in slices over time. This gives your pension more time to grow and means you can hopefully secure higher annuity incomes as you age.”
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