Savers rush to annuities as bond chaos boosts income

Sunday Money - Blok Magnaye
Sunday Money - Blok Magnaye

A rare opportunity for savers to retire on a higher income has emerged in recent days thanks to market chaos unleashed by the Government’s new economic policy.

Savers who lock in an annuity rate today can earn tens of thousands of pounds more over their retirement than those who bought the best deal just a year ago following the dramatic rout in the bond market.

Pensioners can secure £41,000 more over the course of retirement if they buy an annuity now with £100,000 relative to what they would have received at the same time last year, according to data from the stockbroker Har­greaves Lansdown.

Annuities exchange a lump sum for a guaranteed income until death. Income paid by annuities is based largely on the yield on British government bonds, or “gilts”.

Last week gilt yields rose to highs not seen in more than a decade as the Government’s mini-Budget triggered a historic sell-off in its bonds.

Now, a 65-year-old who buys a “­single-life” annuity with £100,000 can secure a yearly income of £7,000. In September 2021 the same £100,000 would have bought an income of £4,941. Over the course of a typical 20-year retirement this adds up to a difference of just over £41,000.

Helen Morrissey, of Hargreaves Lansdown, said the vastly improved rates were attracting more people to annuities, which have long been out of favour thanks in part to the introduction of the “pension freedoms” in 2015, which opened up more options for retirees.

Annuity rates have suffered from low interest rates over the past decade. Just three years ago a £100,000 ­single-life annuity would have bought an annual income of just £4,692, 49pc lower than current rates.

Ms Morrissey said: “Many people turned their backs on annuities because they believed them to be inflexible and offer poor value for money. But rates at current levels could see people take a closer look and tempt those who are currently drawing down from their pension.”

Canada Life, an annuity provider, said the number of savers to ask for an annuity quote had surged by 51pc in the 10 days between September 18 and 27 relative to the same period last year.

Annuities are likely to settle at today’s higher rates, according to William Burrows of the Retirement Planning Project, a financial advice firm. “Rates will not fall soon because the cost of long-term borrowing and inflation will remain high,” he said.

Mark Ormston, a financial adviser, said annuities were becoming an increasingly attractive option for retirees with excess cash who wanted to secure an income to cover their essential expenses and worry less about the impact of the stock market on their invested pension.

“Using a mix of annuities and pension drawdown would deliver the best outcome for the majority of people,” he said. “It is likely that we are going to see further interest rate rises, so better rates could be on the horizon.”

However, he advised against trying to time the market. “On average, it takes two months to complete the purchase of an annuity. The majority of providers will pass on rate increases automatically, so you will still get an uplift if there is significant movement in the market during that period.”

While annuity rates are at a 10-year high, they could climb even more next year. Market expectations are that the Bank of England could increase the Bank Rate to as high as 5.75pc next year.

In this scenario, the rate on a £100,000 “joint-life” annuity, which continues to pay out to a spouse after the policyholder dies, could surpass £6,000 next year, according to the Retirement Planning Project.

It currently stands at £5,795, a rise of 47pc since January, when retirees got £3,497. Ms Morrissey said those worried about locking into an annuity now and missing out on possible higher rates in the future could take a more gradual approach.

“Annuitising in stages throughout retirement, rather than doing the whole pot at once, enables you to benefit from better rates as you get older,” she said.

“You may also qualify for an ‘enhanced’ annuity at a later stage.” An enhanced or “impaired life” annuity offers higher payments to retirees with serious health conditions.