By Mark Ormston
The annuity rate plays a crucial role in determining how much guaranteed income you receive over your lifetime or for a fixed period when using your private or company pension savings to buy an annuity. The good news is that providers are currently offering some of the best annuity rates for years. That means more income for people choosing an annuity.
What’s happened to UK annuity rates?
By early October, UK annuity rates had climbed to the highest level seen since 2009. As an example, Moneyfacts and Pensions Age reported that annuity rates had increased by 52% in the previous nine months, according to Canada Life research.
Rates for index linked annuities, where income payments increase each year in line with inflation, had seen an even bigger improvement, rising by 77%.
The same research showed that the increase in UK annuity rates meant that a 65-year-old whose £100,000 pension pot would have achieved a £4,521 annual income in January this year would now be able to secure £6,873 per year.
Retirement Line have seen annuity rates fall back slightly towards the end of October and into November, but they are still very competitive and at or near the highest they have been for years.
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Annuity rates and the ‘break-even’ point
Another indication of higher annuity rates is what they do to the ‘break-even’ point. This is the point at which an annuity holder will have received the original amount of their pension back through their annuity income.
The Canada Life research found that this had reduced by seven years. Whereas the break-even point had been 22 years in January 2022, by early October it had reduced to just 15 years.
Another way to look at this is how much income in total an annuity can produce. At Retirement Line, in October we looked at a 70-year-old with a fund of £100,000 securing a rate of 6.39%. If they chose a lifetime annuity with a 30-year guarantee period (a form of death benefits), the annuity would pay out a minimum of £191,700 to the policyholder or their beneficiary over the 30-year term – almost double the value of their pension savings.
Don’t forget enhanced annuities for the best annuity rate
Annuity rates and incomes discussed in the media are typically based on people with no rateable health conditions or lifestyle factors. But in fact, at Retirement Line, nearly 92% of our customers who bought a lifetime annuity last year were eligible for an enhanced annuity that pays more income for life.
An enhanced annuity pays more based on adverse health or lifestyle. The provider assumes that people eligible for these plans may not live as long as those with a clean bill of health. They therefore compensate by paying a higher regular retirement income for life.
Why have annuity rates risen so much?
The rise in the best annuity rates available is because annuity providers typically link the rate they offer to the yields of long-term government bonds. These yields are themselves linked to the Bank of England base rate.
As the base rate and yields have increased significantly during 2022, the effect on annuity rates is good news for anyone looking to turn their pension savings into income via an annuity.
When is the right time to purchase an annuity?
There is of course no guarantee as to how long the currently high rates will be available. Nobody can predict with certainty what will happen tomorrow of course, let alone in the next few weeks or months.
As we all know, the UK economy is in a state of fluidity and things are changing all the time. If you are eligible for an annuity, you may therefore decide to act now rather than risk missing out on today’s rates.
At the very least, if you are currently interested in receiving annuity income, now would be a very good time to obtain a personalised annuity quotation. This would enable you to make your own decision about when to purchase your annuity.
Shopping around for the best annuity rate
Annuity rates vary significantly from provider to provider. We have seen as much as a 15% difference between the lowest and highest rates available on the annuity market.
This is one of the reasons why we recommend exercising your 'Open Market Option' to find the best annuity rate available. This means seeing how much retirement income the leading annuity providers could guarantee from your pension fund.
At Retirement Line, our Annuity Specialists can provide you with a comparison of the best annuity rates from the UK’s leading annuity providers. You could also benefit from the preferential annuity rates we secure due to our position as the UK’s number one annuity broker* and our close relationships with the UK’s best annuity providers.
For a free, no-obligation annuity quote, try our free annuity calculator. If you’d prefer to speak with an Annuity Specialist directly, you can call us on 0800 652 1316, request a call back or email us at firstname.lastname@example.org.
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About the author: Mark Ormston is Retirement Line’s Director of Propositions and Corporate Partnerships. You can follow Mark for more pensions and annuity updates on LinkedIn and Twitter.
* Equifax Touchstone pension income and annuity sales figures 2018-2020. Matrix Financial Solution Inc. annuity sales figures 2021