Pensioners’ £34,000 boost from surging annuity rates

Retirees taking out an annuity today are earning hundreds of pounds more than those who bought the best priced deal just a few weeks ago, following a dramatic rout in the bond market.

Pensioners can secure £400 a year more if they buy an annuity now with £100,000, versus what they would have received three weeks ago, according to data from the broker Hargreaves Lansdown.

Annuities exchange a cash lump sum for a guaranteed income until death. Income paid by annuities is based largely on the yield on British government bonds, or “gilts”.

Gilt yields have risen to highs not seen in over a decade, as the Government's mini-Budget last week triggered a historic sell-off on its bonds.

This means that a 65-year-old who buys a single life annuity with £100,000 now receives a yearly income of £6,637. In September 2021, £100,000 would have bought an income of £4,941. Over the course of a typical 20-year retirement, this adds up to a difference of almost £34,000.

Helen Morrissey, of Hargreaves Lansdown, said: "Annuity incomes have surged this year, hitting highs that we have not seen for more than a decade. Many people turned their backs on annuities because they believed them to be inflexible and offer poor value for money but rates at this level could see people take a closer look and tempt people currently in income drawdown to get a quote to see how it affects their options.”

Annuities have fallen out of favour in recent years, thanks in part to the introduction of pension freedoms in 2015, which opened up more options for retirees. Annuity rates have also suffered from low interest rates over the past decade, which contribute to lower gilt yields.

However, annuities could settle at current higher rates, according to William Burrows, of the Retirement Planning Project, a financial advice firm.

“Rates will not fall soon because the cost of long-term borrowing and inflation will remain high,” he said.

Market pundits now expect that the Bank of England could increase the Bank Rate to as high as 6pc next year. In this scenario, the rate for a £100,000 "joint life" annuity, which continues to pay out to a spouse after you die, could surpass £6,000 in 2023, according to the Retirement Planning Project. It currently stands at £5,795.

Ms Morrissey added that those worried about locking into an annuity now, and missing out on possible higher rates in the future, could take a more gradual approach. "Annuitising in stages throughout retirement rather than doing the whole pot at once enables you to benefit from better rates as you get older," she said. "You may also qualify for an enhanced annuity at a later stage.”

An enhanced or "impaired life" annuity offers higher payments to retirees with serious health conditions.