Pensioners get £1,400 a year extra income from forgotten savings option – ‘will go higher’

Inflation: Victoria Scholar discusses rise in interest rates

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While the big banks have been slow to pass on Bank of England base rate increases to savers, rates on annuities have shot up this year. Pensioners should consider this retirement income option once again, experts say.

Exclusive research for shows that annuity rates have jumped more than a quarter since April 2021.

An annuity is the guaranteed income for life you can buy with your pension, and used to be the default choice for retirees.

Annuities offered poor value as the BoE slashed base rates to almost zero after the financial crisis.

Sales collapsed in the wake of April 2015’s pension freedom reforms, which allowed pensioners to leave their retirement savings invested via drawdown, and take cash as required.

Now retirement advisors say pensioners should consider annuities again because they have two advantages. First, they offer income for life, no matter how long you live, whereas drawdown has no guarantees.

Second, rates are dramatically improving, and could soon rise even higher.

In April last year, the average 65-year-old with £100,000 would have generated income of just £4,882 a year from a level single life annuity.

Today, they get £6,264 a year, Hargreaves Lansdown figures show.

That would give them an extra £1,382 a year, a rise of more than 28 percent.

“Annuity rates have rise rapidly in recent months, helped by five straight interest rate hikes from the BoE since December,” says Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown.

Today, base rates stand at 1.25 percent, up from 0.1 percent in December.

The Bank’s monetary policy committee is expected to hike rates again at its next meeting on August 4, probably by 0.5 percent.

That would push base rates up to 1.75 percent, and drive annuity rates even higher.

There may be more base rate increases to come this year, and if so, annuity rates will climb again, Morrissey says.

READ MORE: Pensioners shun annuities despite rocketing rates. ‘Drawdown’s better’

This gives pensioners an opportunity to generate more retirement income, and fight back against the cost of living crisis.

Yet buying an annuity is not right for everybody.

Morrissey notes that once you buy an annuity it cannot be unwound. “Many are reluctant to lock into a rate that subsequently rises, which meant they could have got a better deal if they had delayed their purchase.”

However, you are under no obligation to spend all your pension on an annuity. “A better approach could be to annuitise in stages, to secure income as you need it.”

This has a double benefit, as you will get more income as you age, she says. At 70, for example, £100,000 buys level single life annuity income of £7,101 a year, while at 75 retirees can get £8,418 a year.

That’s because life expectancy falls as you age, so the annuity company does not expect to pay out for as long so can pay more.

“You may also get for a further boost through an enhanced annuity if you develop a medical condition,” Morrissey adds.

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Another downside to buying an annuity is that if you die shortly after, you cannot pass the income to loved ones.

Couples can get round this by taking out a joint life annuity, that will continue to pay 50 percent income to a surviving spouse or partner.

Or you pay extra for a policy feature called value protection, which lets loved ones inherit unused annuity.

Most pensioners will continue to favour via drawdown, to benefit from stock market growth, but this is also risky as share prices get volatile.

So examine all your options and consider taking independent financial advice.

Most importantly, shop around.

Only five companies now offer annuities, Aviva, Canada Life, Just, L&G and Scottish Widows, but competition is intense.

Morrissey says banks have been slow to hike savings rates because they haven’t really had to. “During the pandemic, people built up their savings, which means banks are sitting on a lot of cash.”

By contrast, annuity companies are constantly fighting for new business, and are quick to hike rates.

Victoria Scholar, head of investment at Interactive Investor, said: “Rising rates a rare piece of good news for pensioners, but will frustrate those who have already locked into an annuity as they cannot unwind it.”

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