Is Now a Good Time to Buy an Annuity? Should I Buy an Annuity? What are the Best Annuity Rates?
After 14 years of historic low interest rates, it is fair to say that we have not had too many clients contacting us to discuss annuity options. The low-interest rate environment saw annuity rates fall to a level that made riskier investments – such as those that will fluctuate in value, like equities and bonds – the destination of choice for even the most cautious of investors.
It simply hasn’t been an attractive or even affordable proposition to exchange hard earned cash for a lifetime income when in some cases it may have meant living to an age that would match average life expectancy to simply receive a return of the original capital used to purchase the annuity.
This year has been very different – as we are all too well aware – and as central banks have had to raise interest rates around the world in a desperate attempt to rein in spiralling inflation, this has had the effect of raising annuity rates to levels we have not seen since prior to the 2008 financial crisis.
With annuity rates at 14-year highs, it means that retirees can now get thousands of pounds more for the same amount of money.
50% more for your money – and rising??
To put this into context: this means a 65-year-old with a pension valued at £100,000 and wanting to buy an annuity now would be able to secure a guaranteed income of £7,474 per year. Just 12 short months ago, the same individual would only have received an income of around £5,000 in comparison.
The break-even point
The so-called break-even point – that is the point at which you would receive the original capital used to buy the annuity back through the income – has been reduced from 22 years to 15 years.
So, we ask the question: Is now a good time to buy an annuity?
Before we attempt to draw any conclusions, let’s consider again why annuity rates are rising:
It is important to understand that annuity rates are intrinsically linked to government bond yields – also known as Gilts. When Gilt yields fall, so does the amount of income you could purchase through annuity, but as yields rise – as we are now seeing – this works the other way around and the amount of income you can secure for the same sum of money increases accordingly.
If we look back to just December 2021, the 15-year Gilt yield was around 0.88%; it has since been climbing steadily and recently hit a high of 5.05% following the – now largely reversed – ‘mini-budget’ and at the time of writing sits at 4.33%.
Of course, with interest rates forecast to continue rising, we may continue to see rates move upwards. However, it should also be kept in mind that prevailing market prices typically factor in not only current but expected movements and so delaying and waiting to see where interest rates move to does not come with a guarantee you will able to secure a better rate.
Poised for a comeback
It has been estimated that just 10% of pension savings were used to buy an annuity in the 2020/21 tax year, with drawdown offering not only greater flexibility but perceived better value for most. There is no doubting that annuity sales are set for a serious uptick from recent years. Whilst it won’t be the best option for everyone – given their lack of flexibility versus drawdown counterparts – annuities are sure to become a serious part of the retirement conversation once again.
Should I buy an annuity?
Deciding whether an annuity is right for you is, of course, a separate question entirely. Generally, purchasing an annuity is an irreversible decision and save for certain fixed term annuities, is a purchase for life. It is therefore essential that you fully consider your options, choose the right type and secure the best deal you can.
Advantages of annuities include:
An annuity will provide a guaranteed income for life, no matter what age you live to.
You will know exactly how much you will receive each year without worrying about financial markets or even future changes to interest rates.
An annuity can be bought on a single or joint life basis; the latter suitable if you want to ensure payments continue after your death.
Annuities can be purchased on an escalation basis if you want to ensure you are protected from future rises in the cost of living – although the starting amount you receive will be lower if choosing this option.
If you are a smoker or have (or have had) certain health issues, you may qualify for an enhanced annuity rate.
There are flexible drawdown pensions that will allow you to purchase an annuity within the pension. This allows the income received from the annuity to remain in the pension until a later date if you have no requirement for it now. This can also be a useful option for those that want to use an annuity as part of a more diversified approach to retirement which also includes flexible drawdown.
Like all financial products, there are also disadvantages to consider; some of these include:
Annuities are not flexible. If you suddenly experience a change to your income requirements, you won’t be able to access a larger sum.
If you’re retiring relatively early, the rate you will get at age 55 for example will be considerably lower than the rate you would get at age 65. In this scenario you may want to consider a hybrid approach or perhaps use a drawdown facility initially with a view to purchasing an annuity as you get older. The rates however may change in the future and therefore be lower than could be secured now.
Annuities won’t be a good option if you’re planning to leave wealth to your children through your pensions. Depending on the option chosen at outset, the annuity will cease on your or your partner’s death. Annuity guarantee periods are typically 5-10 years although some providers will offer longer.
Additional features such as guaranteed periods, dependents pension and escalation all come at a cost. You may find the income is substantially lower than you had hoped for once these have been accounted for.
Getting it Right: Speak to an Expert…
Retirement is often a complex area of financial planning and one where the decisions you make are likely to have significant implications not only for you but your family too, where applicable.
Before making any final decisions, it would be strongly advisable to discuss your options with a financial planner who is experienced with all aspects of retirement planning – not solely annuities. It is worth remembering you don’t have to use all of your pension to buy an annuity, you could use part to cover a certain level of expenditure and then access the remainder via a flexible drawdown scheme for example.
For more information or if you would like to explore your retirement planning requirements in more detail – be that annuities, flexible drawdown, or a hybrid approach – we are here to help. Please give us a call or send us a message using the contact form and we will do the rest. We look forward to helping you.