Annuities under the spotlight at international pensions conference

Retirement Line’s Mark Ormston spoke at the online event on 24 September. He looked at three reasons that annuities have surged in popularity recently.

1. Annuity rates are at the highest level for years 

Mark showed that the total income someone can expect from an annuity has grown significantly. He looked at the example of a healthy 65-year-old using £100,000 to take out a lifetime annuity with level payments and a five-year guarantee period.

Someone who bought an annuity in 2021 will get a total income from it of £100,000 by the time they are 85. In other words, it would take 20 years before they start to get a return from the pension savings. 

But someone buying an annuity in the same circumstances today will receive their £100,000 back in just 12.5 years. By age 85, they will have had total income of £160,000. That’s a guaranteed 60% return on their annuity purchase over 20 years, fuelled by today’s annuity rates at about 8%.

It’s no surprise that people who may have felt an annuity offered poor value in the past are now choosing one to lock in regular income.

2. Changes to rules on pensions and inheritance tax

Mark then turned to the effect of new rules on pensions and inheritance tax (IHT) taking effect in the UK on 6 April 2027. 

There are reports that more people are gifting their pension income to loved ones through lifetime and fixed term annuities now, rather than leaving their money where it is (gifting rules apply). Others are accessing some of their pension savings earlier than they had planned for other reasons. These include a response to ongoing cost of living pressures. An annuity is one way to access pension savings with these goals in mind.

Mark also looked at how, under the new IHT rules, payments from a joint life annuity to an annuity holder’s named beneficiary after death will likely be exempt from IHT. He said that Retirement Line is seeing more pension savers explore joint life annuities as part of their IHT planning.

Money left to a spouse or civil partner is always exempt from IHT, but joint life annuities aren’t just suitable for those circumstances. The beneficiary can also be a cohabiting partner or an adult child. However, some annuity providers require proof of financial dependency. As always, pension savers should seek professional tax advice for clarification.

3. Using an annuity to ‘bridge the gap’

Mark finished his presentation by looking at the potential role of an annuity to ‘bridge the gap’ between someone’s State Pension payments and the minimum level of guaranteed income they require.

He referred to the latest Retirement Living Standards (RLS) suggested minimum retirement income of £13,900 per year. At current annuity rates, someone would need to buy an annuity with around £14,000 to achieve the £1,352 gap between the State Pension and the RLS minimum.

Many people of course use more or all of their pension pot to buy an annuity. But this example shows how using some of your pension savings to lock to guarantee a base income level is one option.

Positive change ahead for pension savers

Mark finished with a run through other trends and changes across the pensions landscape. These will all potentially support consumers with their pension planning and outcomes.

They include Targeted Support, a new way to access useful information without paying for bespoke financial advice. Along similar lines, from 2029 Guided Retirement will give pension savers a set of default income solutions from which to choose.

Similarly, new types of workplace pension schemes are providing new ways for people to save into a pension and access their savings at retirement. Known as CDC and R-CDC schemes, Mark expects more of these to become available to workers in the coming years.