Pensioners could be in line for a big 24 percent pay rise as interest rates continue to soar and hit four percent. The rise in annuity rates is a piece of good news for pensioners desperate to generate reliable income in retirement.
According to HL’s annuity comparison service as of March 16, a 65-year-old with a £100,000 pension could get up to £6,718 per year in annuity income.
An annuity is a guaranteed income for life that retirees can buy with their pension pots when they reach retirement.
Most pensioners now leave their money invested via income drawdown, and take income or cash lump sums as required.
However, drawdown can be highly risky as pension pots could plummet if stock markets crash, reducing the amount of income savers can draw.
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Annuities can offer much greater security because the income they pay is guaranteed to last for life, regardless of what happens to share prices.
Since last year, annuity rates have been paying higher income too.
Rates climbed steadily before incomes hit a multi-year high in October 2022 at £7,586 in the aftermath of the mini-Budget.
They have since come down and started to level off but remain good long-term value.
Pensioners could still get up to £6,718 per year in annuity income, which is 24 percent higher than the same point last year when the Bank of England started to hike interest rates.
Despite annuity rates levelling off, they could benefit from an interest rate boost which could be looming as the inflation figure increased today to 10.4 percent.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “After years in the doldrums, annuities enjoyed a crazy ride in 2022, as incomes soared off the back of rising gilt yields. They hit a real high in the aftermath of the mini-Budget before drifting slowly downwards and so far, this year they have remained fairly flat.
“An interest rate increase this week could provide a boost to rates but there is also the chance any increase has already been priced in given the Bank of England’s much publicised comments on the future direction of interest rates.
“Incomes may have reduced from the dizzy heights achieved in the weeks following the mini-Budget last Autumn, but they remain 25 percent higher than they were this time last year and 40 percent more than where they were two years ago when record low interest rates kept them pegged back.
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“The jury may be out as to whether we are going to see the Bank increase rates on Thursday, but the fact remains that annuities are offering significantly better value today than they have for years.
“If you add shopping around for the best deal into the mix, then the potential for more income increases.
“Recent data from HL showed the difference between the best and worst paying annuities was around £800 per year. If you disclose any health conditions such as diabetes or stroke in your application, then you stand to get much more.“
Research has shown pension annuity incomes can drastically improve if people disclose their health and lifestyle conditions.
Canada Life shared the story of a 65-year-old man named Richard, who had been saving for retirement. Richard has secured a pension pot of £100,000, and had been looking for an annuity.
The group explained a standard annuity would secure Richard £4,800 per year.
However, Richard is also a smoker, and by declaring this to Canada Life, it could work in his favour.
By informing the organisation of this, Richard can secure £450 per year more, totalling £5,250 per year. By telling Canada Life he is 19 stone, Richard receives £110 more income a year – £5,360.