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After years of slump, annuity rates have finally started to recover, with providers anticipating higher interest rates. They are now at a two-year high and there could be more good news to come.
An annuity is the guaranteed income for life that many retirees buy with their retirement savings when they stop working.
Annuities fell out of favor after the financial crisis when interest rates fell to near zero, hammering returns.
They were also affected by the 2015 pension freedom reforms, which allow retirees to leave their pensions invested rather than forcing them to buy an annuity. Now they could come back into fashion.
Annuity rates have already peaked in two years, with a 65-year-old man with a pension of £ 100,000 earning a typical income of £ 5,099 per year. At one point they paid less than £ 4,500.
Soon retirees could get even more.
The Bank of England is looking to curb inflation and Victoria Scholar, Head of Investments at Interactive Investor, said: “Interest rates are likely to drop from 0.1% to 0.25%.”
That’s still low by historical standards, but it could have big implications for retirees who are wondering how to fund their retirement income.
Helen Morrissey, Senior Pensions and Pensions Analyst at Hargreaves Lansdown, said: “If the Bank of England chooses to raise interest rates, it could give annuities a much needed boost.
She said this additional income would be particularly welcome after the government removed the triple lockdown, increasing the state pension by just 3.1% per year.
This is well below the expected inflation rate of four or five percent, which means the state pension will fall in real terms.
READ MORE: Government said it needs to rethink triple-lock scrap
Morrissey said shopping for an annuity is essential, rather than just accepting the first quote you receive.
You also need to decide whether to buy level income that will stay stable for life or income that will increase with inflation.
She suggested splitting your pension to buy multiple annuities over a period of time, rather than locking yourself into one with your entire fund.
Heather Owen, financial planning expert at Quilter, said annuity rates would improve but millions of retirees would be deprived of them.
“Those who have already purchased a flat annuity would not benefit from an increase in the base rate because they are tied for life. “
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