Retirees are being offered the best “income for life” deals in 17 years, giving pensioners thousands of pounds more each year than they could have secured just a few years ago.
Annuities – which turn a pension pot into a guaranteed income for life – have become much more attractive say experts. For example, a 65-year-old with a £100,000 pension pot can now buy an annual income of up to £7,661 a year for life.
This comes down for those who want to provide an income for a partner after their death, or to guarantee that the annual figure rises in line with inflation.
Annuity rates at 17-year high
Once dismissed as outdated products, annuities are enjoying a renaissance as thousands of retirees seek security after the financial shocks of Covid. The very best deals were seen in early summer and have edged down since, but aside from that brief peak, rates remain higher than at any point since 2007.
Annuities track long-term Government bond yields, which have risen sharply in recent years. With the Bank of England base rate at 4%, annuity providers can offer far better incomes. But that may change, with the Monetary Policy Committee meeting on December 18, when a 0.25 percentage point rate cut is on the table.
Andrew King, pensions technical specialist at Evelyn Partners, told the I Paper that recent market shocks had made the certainty of an annuity far more appealing. He said recent volatility “pushed more retirees towards the security of an annuity”.
People with health conditions such as diabetes or high blood pressure can qualify for enhanced annuities. Former pensions minister Ros Altmann warned that picking the wrong product can leave retirees short-changed.
She said: “It’s not just the rate that matters, but the type of annuity you choose. That can make a huge difference to long-term outcomes.”
She said many who bought basic single-life, level annuities – which do not rise with inflation and do not pay anything to dependants after death – have seen their income eroded over time. Baroness Altmann added: “Annuities are complex products and shouldn’t be bought or sold carelessly. Ideally, people should get advice from a financial adviser.”
Mr King said interest in annuities has been boosted further by inheritance tax changes announced in the 2024 Budget, which will drag unused pension assets into estates from April 2027.
“Money used to buy an annuity is immediately outside the estate and won’t be subject to IHT from April 2027,” he said.
But he warned that while headline rates look attractive, adding valuable features reduces the income offered. “People need to understand that these valuable add-ons come at the cost of a lower starting income,” he said.
Many retirees are now blending annuities with pension drawdown – using part of their pot to buy secure income while leaving the rest invested. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “It’s really important to do your research. If you are married for instance you may want to consider a joint life annuity rather than a single life one.”
She added that inflation-linked annuities rise every year but start at a lower level: “You will need to consider the fact that the inflation linked product will take several years before the income reaches the same level as a level one.”
She stressed that retirees do not need to commit their whole pot at once: “Instead you can annuitise in slices over time. This gives your pension more time to grow and means you can hopefully secure higher annuity incomes as you age.”
With interest rates expected to fall, experts warn the window to lock in these 17-year-high incomes may soon narrow. Retirees are being urged to compare rates carefully and seek advice before signing up.
