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Find out moreWritten by David Slater, Retirement Line CEO
Consistency was the theme for the UK annuity market in 2024. Annuity rates continued to hold at or near the highest level for a decade, and consumer interest in annuities remained strong.
In his review of the annuity market for 2024, Retirement Line CEO David Slater looks at what happened to annuity rates and how that translated into annuity sales. He also discusses the potential impact of the October Budget on annuities.
Before looking at the annuity market for 2024 alone, let’s recap on what has been happening over the past two years or so.
The headline is that annuity sales have increased significantly. According to Financial Conduct Authority (FCA) data, annuity sales increased by 38.7% from 2022/23 to 2023/24.
The FCA reported that this was the biggest percentage increase in sales of any type of retirement income product in this period. It compares with a 27.9% increase in sales of income drawdown in the same period.
This strong growth in annuity sales was of course largely fuelled by higher annuity rates offered by annuity providers. Canada Life reported an increase in lifetime income for a 65-year-old with a £100,000 pension pot from £4,521 in January 2022 to £6,873 in October 2022 – a 52% increase.
Our experience at Retirement Line in the same period was that a significant number of pension savers were aware of the boost to annuity rates. We certainly saw an increase in enquiries from people eager to see what level of guaranteed income they could lock in from their pension savings.
Fast forward to 2024 and annuity rates were higher still. An annuity bought by a healthy 65-year-old with £100,000 of pension savings rose from £7,162 in January to £7,528 in June (Retirement Line data). Annuity rates remained at around this level for the rest of the year.
Annuity rates are of course in part influenced by the Bank Rate. The rate was cut from 5.25% to 5% on 1 August 2024, and then maintained at 5% on 19 September. It was cut to 4.75% on 7 November and was held there on 19 December.
It’s interesting to compare annuity rates with the Bank Rate. Let’s look again at the example of a 65-year-old using £100,000 to buy an annuity:
2024 Bank Rate and annuity rate levels |
||
Date |
Bank Rate |
Annual annuity income |
Jan |
5.25% |
£7,162.68 |
Feb |
5.25% |
£7,281.00 |
Mar |
5.25% |
£7,405.44 |
Apr |
5.25% |
£7,343.52 |
May |
5.25% |
£7,472.88 |
Jun |
5.25% |
£7,528.44 |
Jul |
5.25% |
£7,545.60 |
Aug |
5.00% from 1/8 |
£7,554.12 |
Sep |
5.00% |
£7,458.72 |
Oct |
5.00% |
£7,496.40 |
Nov |
4.75% from 7/11 |
£7,435.08 |
Dec |
4.75% |
£7,444.92 |
Note: Annuity rates generated at or near the first day of each month by Retirement Line’s in-house annuity quote system, which gathers quotes in real time from the UK’s leading annuity providers. Rates based on standard conventional lifetime annuities for a healthy 65-year-old in a Peterborough postcode (PE7 8JG), with the payments level and payment frequency set to monthly in arrears. Higher rates and more income would be very likely for those qualifying for an enhanced annuity.
Annuity rates tended to fall only very slightly around the time of Bank Rate cuts, and consumers’ enthusiasm for annuities has remained high. This is despite some rather alarming predictions reported in the financial media: one mid-August article was titled ‘Rate cut could spell trouble for annuities’. That has certainly not been the case.
However, that’s not to say that further changes to the Bank Rate won’t have an impact on annuity rates. We continue to keep a keen eye on Bank Rates, with the next announcement from the Bank of England due on 5 February.
The Bank of England stresses that its inflation target for interest rate cuts is 2%. With inflation at 2.5% we are some way above that target. In any case, the Bank of England’s Monetary Policy Committee looks beyond the headline inflation rate, taking into account how fast prices are rising, how the UK economy is doing and how many people are in work.
Given how tight the numbers are, I defy anyone to predict what will happen next. I’m not a gambling man, and even if I were, a coin toss would probably be just as reliable as even an educated guess on the next Bank Rate decision.
When it comes to gilt yields, which typically have a greater effect on annuity rates than interest rates, the story is rather different. The headlines during 2024 were largely about rising gilt yields, in contrast to stable and then slightly falling interest rates.
As one example, the 10-year gilt yield climbed significantly from 3.75% in mid-September to 4.21% in early October, as reported on 8 October by IG.com. It rose further to 4.41% following the October Budget, as reported by Yahoo Finance. By 9 January 2025, Morningstar.co.uk was reporting that the 10-year gilt yield was trading at 4.84% - its highest level since 2008.
Turning to the 15-year gilt yield, which is regarded as a major determinant of annuity rates, this rose from 3.925% on 1 January 2024 to 4.481% on 2 December 2024. As I complete writing this article, I see that it closed at 4.961% on 20 January 2025 (Marketwatch.com).
Here again, I choose not to get into predictions about how gilt investors will react to changing economic conditions. However, if inflation remains stubbornly above the Bank of England’s 2% target, common sense might suggest that a significant drop in gilt yields could be unlikely.
That Autumn Budget of 30 October 2024 certainly created a stir in the pensions sector, for the industry and consumers alike.
Ahead of the Budget, there was speculation about a change to the amount of tax-free cash that people can take when accessing their pension savings. This saw an increase in people accessing their tax free cash during September and October. We took many calls from consumers who were concerned about the rumours of reducing the tax-free cash limit.
Given that pensions are a lifetime saving product to fund potentially over 20 years of life after work, this speculation was very unhelpful. It led to consumers making knee jerk reactions on the back of rumours that unfortunately the Treasury did not quell.
In the end of course, there weren't any changes to tax-free cash. The big change was the inclusion of pensions in IHT calculations from April 2027.
This is not the first time that a government sees the pension wealth of the nation as a source of funds to help balance the books. The fact remains that as a nation we are not saving enough to fund comfortable retirements. There really needs to be more long-term and sensible debates about future changes to pension legislation.
Just as pension freedoms turned the retirement planning world upside down in 2015, I suspect that the IHT change could have a major impact on the retirement solutions people choose.
There is still a long way to go for the government’s IHT consultation to complete. Once it does and the dust settles, we will know more about how IHT on pension pots and income (including annuity income) will be implemented.
At the moment IHT is paid by just 4% of estates, but rising house values will see more estates brought into the threshold. With the introduction of IHT on pensions - and the average size of pension pots likely to keep increasing due to auto enrolment - IHT will be a reality for even more people.
We could see more families looking at ways to mitigate their liability, with reviewing their pension arrangements a part of this. There is a scenario where choosing to buy an annuity with some or all of a pension pot could reduce IHT liability, depending on the outcome of the consultation.
That scenario, along with the ongoing attractiveness of annuity rates, could see even more people choosing an annuity instead of or alongside drawdown in the coming period.
I may, of course, be biased as CEO of an annuity brokerage, but I can’t help feeling that the trend towards annuities could be in some consumers’ best interests. Many credible surveys show that people want certainty about their income in retirement, so it does seem strange that just over three times as many people choose drawdown over annuities.
Today’s high annuity rates - and the spotlight on pension planning created by the Budget’s IHT announcement - is prompting more people to think carefully about their pension income options. That can only be a good thing, as any decision about retirement income should be considered and well-informed.
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