Annuity rates are better than they have been for a long time thanks to the UK’s sticky inflation problem. High inflation isn’t great, but one potential benefit is rising annuity rates, which rise or fall with gilt yields and interest rates. Last week the Bank of England reported that consumer price index inflation (CPI) in April fell from 10.1 per cent to 8.7 per cent, but this was higher than the 8.4 per cent it had forecast. As a result, it is almost certain that there will be further interest rate rises. Gilt (UK government bond) yields rose to levels close to those following last year’s mini-Budget.
Some annuity providers have already increased their rates. Taking the top annuity rates available as of 25 May, a 65-year-old could purchase a single-life, level, five-year guaranteed annuity paying an annual income of £6,791 for £100,000, according to Hargreaves Lansdown. Although this is less than the £6,994 on offer at the end of September last year in the aftermath of the ‘mini’ Budget, it is a lot more than autumn 2021’s £4,989. The tricky part is deciding whether to purchase now or to wait in the hope that UK interest and annuity rates might increase further. If you wait to buy, you might get an even higher rate, given the current economic environment.
But if inflation falls more than expected in the coming months, annuity rates could fall. And even if gilt yields and/or interest rates rise, individual providers might choose not to offer higher annuity rates to customers.
You should consider a number of other factors, in particular whether you need the income now, according to Ian Cook, a chartered financial planner at Quilter.
More importantly, if you wait, the value of the pension pot with which you will buy the annuity might decrease if it is invested in equities and/or bonds, or you have drawn capital from it while waiting. So, even if annuity rates are higher, you might get the same or a lower income than if you had bought earlier.
If your pot does suddenly lose value, Cook suggests waiting for your pension fund to recover before buying an annuity and get an income from drawdown in the meantime. Ideally, this should be from dividends and bond interest so that you do not deplete the capital value further. Or you could take income from other sources such as cash, individual savings accounts (Isas) and rental income, and annuitise your pension pot when its value increases.
A way to avoid the value of your pension fund falling near the time you want to buy an annuity is to gradually build up a cash reserve in it well ahead of retirement.
If you need some income now, you could partially annuitise – taking as much as you need, for example, to cover your current cost of living – and decide what to do with the rest at a future date. Nick Flynn, retirement income director at Canada Life, also suggests fixed-term annuities which run for a specified term, often between five and 10 years, so don’t lock you into a rate for the rest of your life.
One reason to wait to buy an annuity is if you are likely to qualify for an impaired life annuity when you’re older, for example, because you have an illness or your health is deteriorating. These pay higher rates. And standard annuity rates get better as you age, so if you don’t need the income now or have other sources, you could wait until you are older.
If you have old personal pensions, meanwhile, see if their contracts offer higher annuity rates. “Many old contracts have guaranteed annuity rates that are much higher than those [currently] available,” advises Cook.
The IC guide to pensions 2023
The different ways a pension can boost your savings
Five rules to follow when drawing your pension
How to build the perfect pension portfolio
Investment trusts to boost your pension
How to pick the right pension plan for you
‘I’m receiving a DB pension – can I keep saving into my personal one?’
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