Annuity incomes continue to rise - is now the time to buy one?

Annuity rates have improved by 20% over the past year. We look at whether now is a good time to buy an annuity.

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Annuity incomes have continued to climb this year, following multiple base rate hikes by the Bank of England

A 65-year-old with a £100,000 pension could get an annuity income of £7,358 per year, according to the wealth manager Hargreaves Lansdown. This is up from £7,144 just a few months ago.

Two years ago, the same pension pot would have bought an annuity of just £4,946 a year. This means annuity rates have risen by almost 50% since 2021. 

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Separate data from the Association of British Insurers (ABI) shows sales of annuities have reached their highest level since 2014, surging 22% during the first three months of 2023. 

About 16,250 annuities were bought between January and March 2023, totalling £1.2 billion. This is the highest value since 2015 when pensions freedoms were introduced that gave people more flexibility over how to access their retirement savings.

Retirees have been taking advantage of these freedoms by shopping around for the best annuity deal. More than 10,000 people bought an annuity from a different provider to their pension savings provider, the ABI says, making up 64% of sales and totalling £847 million. In comparison, only 55% of sales were made by a different provider in the same period in 2022.

Stephen Lowe, group communications director of retirement specialist Just Group, says shopping around is the “closest thing to ‘free money’ in the retirement world and staying loyal to a provider can cost you dearly”. 

It’s also important to note that once you have purchased an annuity, that decision is locked in, so it is essential you shop around.

Lowe comments: “The gap between the top and bottom providers has widened to the point that a healthy 65-year-old can secure 14% more annual income by securing the best instead of the worst rate, and potentially an even higher income depending on lifestyle factors and medical history.” 

Why are annuity rates rising?

Annuity rates are linked to government bond (gilt) yields, which soared last year, particularly following the mini-Budget in September. 

Back in January 2022, the 15-year gilt yield was around 1.15%. It reached 3.5% in mid-September, and following the mini-Budget shot up to nearly 5% before the Bank’s emergency gilt purchases eased it back down. Currently, it’s around 4.5%.

“Annuity incomes have been shooting up over the past 18 months,” says Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.

“Apart from a brief period last autumn, when the mini-Budget sent gilt yields rocketing, you haven’t been able to get incomes like this from an annuity for well over a decade.

“Rising interest rates are one factor that feed into annuity rates. It’s no certainty that we will see further increases off the back of [today’s rate hike to 5.25%], but it is a strong possibility, and we can expect retirees looking for a level of guaranteed income to keep a close eye on the market.”

Annuities have previously been out of favour among retirees, with just 10% of pension savings used to buy an annuity in the 2020-2021 tax year. Pension drawdown is typically seen as more flexible, and better value for most retirees.

But experts say annuities are making a comeback following the rate rises, which will give retirees an income boost. Annuities are an attractive option for those who prefer the security of the guaranteed income they provide. 

According to Hargreaves Lansdown, the number of annuity quotes run on its search engine has risen 120% when comparing August 2021 - July 2022 and Aug 2022 - July 2023.

Is an annuity the right option for me? 

If you decide to buy an annuity, it is worth noting that this decision is irreversible and therefore it is important to take the pros and cons of buying an annuity into careful consideration. 

Here are some things to consider:

  • You don’t have to use all of your pension pot to buy an annuity. You could use part of your pension, and access the remainder of the cash via drawdown, which can give you more flexibility over how you take income from your pot.
  • You can choose what age to buy one. You may prefer to use drawdown to begin with, and buy an annuity later. It’s worth noting that the older you are, the better the annuity rate.
  • You can continue to pay into your pension pot after you’ve bought an annuity. But remember, the usual tax rules apply; most savers can contribute up to £60,000 each tax year (known as the annual allowance) and benefit from tax relief.
  • Annuity income is taxable, so it may affect any potential income-tax bill.
  • Don’t just accept the annuity rate offered to you by your pension provider – always shop around for the best rate. Use the free annuity comparison tool from the government-backed MoneyHelper service to help find the best rate.
  • If you’re unsure about your options, speak to a financial adviser or specialist annuity broker first. The wrong decision could end up being costly

What is an annuity?

An annuity is an insurance product that pays a guaranteed income for life in exchange for your pension pot. 

When you retire, you can choose to swap your nest egg for an annuity, or keep the pension as it is and take cash from it when you need – this is known as drawdown.

There are different types of annuities:

  • An enhanced annuity – this pays a higher amount if you are ill or a smoker, factors which the insurer believes will affect your life expectancy
  • An index-linked annuity – this is linked to inflation
  • A “joint life” annuity – this pays an income to a spouse when you die
  • Fixed-term annuities – pay an income for a fixed period, say 10 years, rather than for your whole life

Contributions from Tom Higgins.

Ruth Emery

Ruth is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times. 

A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service. 

Outside of work, she is a mum to two young children, a magistrate and an NHS volunteer.