Annuity rates have jumped about 20 percent this year, but have rebounded from such low levels they may still be too low for many people.

Buying an annuity provides guaranteed income until you die, but they are widely regarded as poor value for money and restrictive. Pension freedom reforms in 2015 encouraged most savers to keep their funds invested and instead live off withdrawals.

The recent rise in interest rates has now led to better annuity deals. £100,000 could buy a healthy 65-year-old man an inflation-protected single life annuity of around 6.2 per cent, or an income of just under £6,200 a year.

Worth a fresh look? Buying an annuity provides guaranteed income until you die

Annuity rates have rebounded after years of decline because UK government bonds, known as gilts, are used to generate annuity income. And the Bank of England’s recent four interest rate hikes to 1.25 percent this year have boosted gilt yields.

General inflation in June was 9.4 and the governor of the Bank of England hinted that a 0.5 percentage point interest rate hike to 1.75 percent could be on the way to combat rising prices, further improving annuity rates.

Meanwhile, financial markets have become volatile amid concerns that the central bank’s aggressive actions could push the economy into recession, worrying people who have invested in their pension fund. Find out what to do if your retirement investments here have taken a nosedive.

“Annuity rates have risen significantly since the start of this year as yields on 15-year gilts have risen, with annuity providers revising their rates several times since January,” said John Greer, head of pension policy at Quilter.

Greer says if you add some inflation protection to a single life annuity for a healthy 65-year-old, you’ll now get a rate of just over 4 per cent, or £4,000 a year, for every £100,000 in pension. a pot

If you add a survivor’s pension to such a deal by buying a joint life annuity, you get a rate of 5.8 percent without inflation protection and just under 3.9 percent with it.

“These rates are still going to be too low for some people to take the plunge and buy an annuity,” Greer says.

Meanwhile, he notes: “Proposed inflation-linked annuity rates have risen more than the year-to-date increase in annuity rates.

“Inflation-linked annuities are typically provided by index-linked annuities. In the first six months of the year, the return on indexed hogs rose more than the return on conventional hogs, which tend to be at annuity levels.’

He continued: “According to the latest data from the Financial Conduct Authority on the pension income market, around a third of annuities are bought on enhanced terms.”

“Three-quarters of annuities are purchased on a single life basis, and only about 16 percent of annuities are purchased with any form of annual increase.”

“Enhanced” means you get a better deal because your health is bad. You can enter personal data and compare annuity rates on the government-backed Moneyhelper website here.

Adrian Lowery, financial analyst at wealth management company Evelyn Partners, says: “Annuities have been the Cinderella option – compared to tax-free lump sums and drawdowns – for those accessing their pension pot since the freedoms were introduced in 2015.

“This was largely due to the minimal return on gilt stocks as they kept annuity rates at unattractive levels. But yields on gilts are now moving back up, so annuity rates are rising rapidly, hitting an eight-year high in June.

“An annuity allows you to exchange a lump sum of your pension for a guaranteed income for life. In truth, buying an annuity or taking retirement isn’t an either/or decision.

One smart strategy is to use part of your pension fund to buy a level of annuity income that will cover – along with your state pension – your basic living expenses.

“The remaining funds in the pension bank could then be held in a drawdown to take advantage of investment growth. Now, a lump sum can buy you an annuity that will give you 25 percent more income now than it would have a year ago.’

Nick Flynn, Director of Retirement Income at Canada Life, says, “The positive rate change over the past four months has been one of the most significant I’ve seen, with a 30 per cent year-to-date increase in Canada Life rates. .

“The trigger was a change in the base rate, while open market annuity providers also sought market share by offering better rates.

“The outlook for annuity rates will remain positive while fiscal policy reverses quantitative easing and the Bank of England tackles inflation.

“Recent base rate changes have been factored into the rates you can buy today, but it’s always wise to look for an annuity.”

Annuity rates and 15-year gilt income since 2014

Canada Life Annuity Benchmark Rates 30 June 2022 Purchase Price £100,000 Healthy Single Life 10 Year Guarantee

Canada Life Annuity Benchmark Rates 30 June 2022 Purchase Price £100,000 Healthy Single Life 10 Year Guarantee

Flynn says the benefits of an annuity include:

– 100% secure lifetime income, not tied to the stock market

– Your health and lifestyle can greatly improve the rate you are offered, so always communicate this

– You can combine annuity and drawdown, it doesn’t have to be an either/or decision.

But he warns that the disadvantages are:

– If you die early, your estate may not get your money back unless you have adequate protection (you can buy a guarantee, see below)

– Your income will be fixed and offer no flexibility unless you opt for some form of inflation linked escalation, which is expensive

– You should not accept an offer from your existing pension company and always shop on the open market.

What else to keep in mind when buying an annuity

– You may be able to get an “improved” rate if you wait to buy an annuity until you’re older and your health doesn’t deteriorate.

– You can rethink your investment and withdrawal strategy and buy an annuity in tandem or as a replacement income source later, but you can’t get out of an annuity once it’s purchased.

– If you’re healthy, your best bets are single life, inflation-free annuities, but the current cost-of-living crisis highlights how important it is to get some protection against rising prices.

– If you buy a single life annuity rather than a joint life annuity, your spouse will get nothing if you die first, so consider what they will have to live on and discuss this with them before you decide.

Many widows and widowers find that their partner’s annuity choice has left them with no income after the bereavement, forcing them to live on meager government benefits.

– Consider buying an annuity with a “guarantee period” that protects against losing all or most of your money if you die soon after.

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