As we exclusively reported on Saturday, the income paid on annuities is finally set to soar as the Bank of England hikes interest rates to combat i
As we exclusively reported on Saturday, the income paid on annuities is finally set to soar as the Bank of England hikes interest rates to combat inflation. The process has already started, with rates climbing more than five percent in January alone.
Annuity rates will continue to increase this month, following February’s BoE base rate hike to 0.5 percent.
Andrew Tully, technical director at Canada Life, said if base rates hit 1.5 percent over the next year as analysts expect, the total increase in income paid by annuities could be 20 percent.
That is a huge boost for people coming up to retirement who want to generate a guaranteed income for life from their pension savings.
Annuities fell out of favour following the financial crisis, when near-zero interest rates hammered returns.
Most new retirees prefer to leave their pension invested in drawdown, and take income and lump sums to top up their State Pension.
That may now reverse as annuity rates soar while the high street banks pay just 0.01 per cent on cash.
Stephen Lowe, retirement expert at Just Group, said the big attraction of buying an annuity is that the income is guaranteed to last for as long as you do.
“By contrast, if you leave your money invested in drawdown there is a danger it could run out altogether, leaving you wholly dependent on the State Pension in later life.”
Pensioners with money invested in drawdown are also vulnerable to a stock market crash, which could deplete the value of the pot and slash the amount of income they can take.
Annuity rates have been so low for long that many people most people have been willing to take that chance.
This could now change as rates finally rebound.
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After January’s increase, a 65-year-old man with £100,000 in pension can now buy “level” annuity income of £4,781 a year.
That is up from around £4,531 at the start of the year, giving him £250 extra income a year, Canada Life figures show.
However, if annuity rates rise by a total of 20 percent as expected, a 65-year-old man with £100,000 pension could get income of £5,450 in a year’s time.
That is a staggering £919 more than today.
Over the course of a 20-year retirement, the same pension pot could generate £18,380 total extra income. That makes waiting for better rates highly tempting, Lowe said.
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There are other factors to take into account. By delaying your annuity purchase, you are sacrificing a year’s worth of income.
Also, if you leave your pension invested in the interim and stock markets crash, your pension pot could actually be smaller next year.
On the other hand, if stock markets climb both your pension pot and annuity rates may be on the up.
Another advantage to waiting as that you will get more income because you will be one year older. The annuity company can pay you more because it does not expect to pay out for as long.
Lowe said there is another option if uncertain. “You could divvy up your pension and buy a series of smaller annuities over time, so you get both income today and higher rates tomorrow.”
These are difficult decisions to make, he added, and it may be worth considering independent financial advice.
Once you have bought an annuity, you are locked into it for life, and cannot reverse your decision later. This will frustrate many of today’s pensioners who bought their annuity when rates were at rock bottom levels.