What's happening to annuities? – Annuity rates have increased significantly this year.
Why are rates rising? – Bond yields have doubled since January
How much have rates increased? – So far this year the income from a £ 100,000 annuity has increased by £1,300 per annum which is 35%
Annuities rates are linked to the yields on fixed interest investments such as gilts and corporate bonds. In January 2022 the yield on 15-year gilts was 1.25% and the £100,000 benchmark annuity paid an annual income just below £ 4,000 before tax.
In July 2022 the gilt yield rose to 2.5% and the benchmark annuity increased by nearly 35% to £5,300 per annum.
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My main criticism of annuities when rates where rock bottom was that annuities just about re-paid the original capital with very little interest. Now that rates have increased the underlying rate of return is about 3%.
Put it another way, if you don’t purchase an annuity but take the same income from drawdown, you will need an underlying rate of return of at least 3% (after charges) plus a bit extra to compensate for the lack of mortality cross subsidy
With so such uncertainty and volatility in the global stock markets and at times, negative returns, achieving steady growth while investing in a drawdown plan is difficult.
This means that if you want to maximise your income in retirement, annuities now seem a better bet than drawdown for those with modest pension pots.
Also, many people underestimate their life expectancy. For example, a 65-year old man can expect to live another 20 years to age 85 whereas a lady of the same age can expect to live to age 87 according to the Life expectancy calculator from Office for National Statistics.
Annuities do something that pension drawdown cannot do and that is guarantee that you will not out live your income. With drawdown you can run out of money but annuities continuing paying income for the rest of your life.
The two most popular questions from clients are; when will annuity rates go up and when is the best time to purchase an annuity.
The answer to the first question is that annuity rates should continue increasing as inflation stays high and yields will continue to increase
The best time is when you need to secure guaranteed income – ideally you can look for the time when funds value are high and annuity rates good value but that is difficult to predict.
Emotionally, ask yourself when do you want more peace of mind and security with your retirment income.