Retirees will get a 20% real salary increase GUARANTEED for life – ‘they’ve been waiting years for this’ | Personal finance | Finance

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Retirement and savings: the Interactive Investor expert gives her opinion

Income paid out from annuities is expected to rise by 20% in 2022 as the Bank of England repeatedly raises interest rates. It’s rare financial good news for pensioners, with the triple lock being lifted and big banks paying a meager 0.01% in cash.

Consumer price inflation soared 5.5% on the year to January, today’s figures show, but annuity yields are expected to rise at an even faster rate, offering retirees who buy them a wage increase in real terms.

The amount of annuity paid depends on two factors: interest rates and government bond yields.

Both are now up as the BoE raises interest rates to curb inflation. As a result, annuity rates jumped 5.4% in January alone, after the base rate increased to 0.25% in December, and are expected to rise further after base rates hit 0, 5% on February 3.

Base rates are expected to rise to at least 1.5% over the next year, which should increase annuity rates by another 14%, according to Canada Life calculations. That’s 20% more over the year.

Becky O’Connor, head of pensions and investments at Interactive Investor, says retirees have been waiting for this moment for years.

Retirees who receive higher annuity income can go out and have fun (Image: Getty)

Annuity rates crashed after the financial crisis, when base rates were cut to 0.5% in March 2009.

Sales then plummeted for more than a decade, falling another 13% in the 2020/21 tax year to just 60,383 in total.

Almost 10 times as many people chose to make flexible pension withdrawals via direct debit instead – 596,080 in total.

Still, O’Connor says demand could now pick up as retirees realize they can get a lot more income, as well as more security.

The great thing about an annuity is that the income is guaranteed for life, no matter how long you live, she says. “On the other hand, the money invested in withdrawals is not guaranteed, and your retirement kitty could dry up if the stock markets crash or if you make too many early withdrawals.”

Annuity rates determine the amount of regular income you will get in return for your retirement savings.

They are usually stated as the amount of money you will receive per year for every £100,000 you contribute, Which? said.

READ MORE: State retirement age ‘to rise past 70 as ax falls on triple lockdown’

Yields hit an all-time low of £4,696 a year in 2016, but today Just Group pays an annuity income to a 65-year-old man of £5,082 a year.

That’s an 8% pay rise – worth an extra £386 a year.

If annuity rates rose another 14% as expected, the same man would earn an income of £5,793 a year, up £1,097 from the 2016 low.

As a result, it may be worth waiting a few months before buying an annuity, rather than rushing to grab one today.

Providers like Canada Life are keen to increase their annuity rates as interest rates rise, in order to provide their customers with a higher income.

With inflation climbing to 5.5% in the year to January, further increases cannot be far away.

On Monday, HSBC economist Elizabeth Martins predicted the Bank of England would be forced to raise rates in March next month and then again in May and August as inflation soars.

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Higher annuity rates are finally something to celebrate (Image: Getty)

She said each increase will be 0.25%, or 25 basis points, taking the base rate to 1.25% by summer.

If she’s right, annuity rates could rise at a breakneck pace.

Canada Life annuity sales manager Nick Flynn urged retirees to watch rates. “Consider taking independent financial advice to decide whether it’s best for you to buy an annuity or leave your money invested in a drawdown, as it’s a complicated decision.”

Retirees must also choose between a level or inflation-indexed pension, or an individual or joint policy for couples.

Remember that annuities cannot be inherited by your family upon your death, unlike pension funds held in direct debit.

Once purchased, an annuity cannot be unwound. Unfortunately, millions of retirees who were previously locked into an annuity will not benefit from the rate hike.

Despite the resurgence of annuities, direct debit may remain the best option for many.

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