Pensions: Interest rates on guaranteed pension income rise 44% in one year | annuities

MInterest rates are still rising, stock markets have plummeted, and high inflation is eating away at people’s savings. It’s pretty grim out there, but a financial product — which has been pretty much written off by a lot of people — looks a lot more enticing than it did a year or two ago.

An annuity is a product that turns a person’s retirement savings into income for life, and there are projections that many more people will now use part of their retirement money to buy an annuity.

New figures released this week showed pension rates have risen 44% in a year and are now at their highest levels since early 2009.

This means someone aged 65 with a £100,000 pension pot could now have a pension income of £7,191 a year – up from £4,989 in October last year, according to investment platform Hargreaves Lansdown.

One way to use the pension pot has long been to buy an annuity. This gives you a regular, guaranteed retirement income for the rest of your life or for a specific period.

But pensions have long been considered substandard, and demand for them plummeted after the government introduced a series of “pension freedoms” in 2015, meaning people no longer had to take out pension insurance. Low interest rates and increased life expectancy have also caused pension rates to fall.

However, the financial and economic conditions are now of course completely different. When interest rates rise, pension rates rise as well. They were boosted by rising long-term gilt yields (the interest rate on UK government bonds).

“The potential earnings for someone aged 65 with a £100,000 pension has increased by £200 [a year] in the past week alone,” said Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, which says it has made nearly 18,000 annuity offers in the last three months — up 70% from this time last year. She adds that being able to guarantee at least part of one’s income in retirement is “invaluable”.

Meanwhile, one of the sector’s big names, Standard Life, said this month that it “is seeing renewed interest in annuities given the income security they offer in the current market environment”.

Once you’ve bought an annuity you usually can’t change your mind so you might want to seek advice and there are many different types.

For example, do you want your pension income to stay the same or increase every year? Would you like a one-off annuity or an annuity that will provide income for your spouse, partner or other dependents after your death (joint annuity)? If you have a medical condition, are overweight or smoke, you may be able to earn more income by opting for an increased or reduced annuity.

Once you’ve bought an annuity you can’t usually change your mind, so you might want to seek advice. Photo: incamerastock/Alamy

According to Standard Life, “timing is key” – an annuity doesn’t have to be bought at the time of retirement, and the later you buy, the more attractive interest rates become.

“Some retirees are put off because once you buy an annuity, the interest rate is locked in forever, so those sitting on last year’s lower interest rates can’t take advantage of more recent increases,” Morrissey says. “However, you should always keep in mind that you don’t have to commit an annuity with the entire pension pot at once. A sensible approach is to stagger parts of your pension and thus secure a needs-based income as and when it makes sense for you. This gives you the opportunity to secure higher rates in old age and you can also be entitled to an increased pension if you develop an illness at a later date, which increases your income again.”

Sean McCann, a chartered financial planner at finance firm NFU Mutual, says this drawdown — where you typically take up to 25% of your pot as a tax-free lump sum and leave the rest invested, either taking an income or withdrawing other amounts as needed — was due to the With low interest rates, it was many years more popular than buying an annuity, but the latter product is now making a comeback.

“Many more people will now consider using part of their retirement fund to buy an annuity while keeping the rest invested and earning variable income or lump sums through drawdown,” he adds.

All too often, retirement is portrayed as an “either/or” choice between retiring and enlisting, although the right option is usually a combination of both, says Tom Selby, head of pension policy at investment platform AJ Glocke.

He suggests that a person could use an annuity to cover their fixed expenses in retirement while retaining flexibility and the opportunity for investment growth with the rest.

It’s important to remember that you don’t have to take an annuity offered by your existing pension fund – you’re free to shop around and buy one from any provider, and you’ll likely get a better deal if you do just that .

Pensions specialist company Just Group says: “Savers should shop around to ensure they are getting the best interest rate available – the difference between the best and worst providers can be as much as 15% in additional income per year, discounting health issues or lifestyle factors is taken into account.”

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