Are annuities back in fashion? Retirement deals offering income for life are paying out more

The modest annuity is back in fashion, with higher payouts meaning more money for retirees at retirement.

Buying an annuity provides a secure income until the owner passes away, but until recently they were seen as poor value for money and restrictive.

The 2015 pension freedom reforms pushed most savers to keep their money invested and live on withdrawals instead.

But now the Bank of England’s recent rate hikes and expectations of more to come have led to better annuity deals.

These pay out about 19 percent more than at this time last year, according to industry-average data from stockbroker Hargreaves Lansdown.

For £100,000, a healthy 65-year-old can buy a one-off annuity with no inflation protection and a five-year guarantee – protecting your money immediately after purchase – for a rate of nearly 6.8 per cent.

That represents a lifetime income of just over £6,790 a year, more than the £5,690 you could have gotten in May last year, Hargreaves said.

Why are annuities more attractive again?

Annuity deals are now nearly back to levels just after last fall’s disastrous mini-budget as this week’s inflation numbers have fueled expectations that interest rates will peak at 5 percent or more.

Annuity rates are rising after years in the doldrums due to increases to the level of UK government bonds, known as gilts, used to generate annuity income.

The Bank of England’s series of rate hikes to 4.5 per cent has improved government bond yields, and more hikes are widely expected to curb inflation.

Headline inflation slowed to 8.7 percent in April, but core inflation — the less volatile version excluding energy, food, alcohol and tobacco, which is closely watched by rate setters — accelerated to 6.8 percent, from 6.2 percent in March.

“Inflation is proving a tricky beast to tame with expectations of further rate hikes,” said Helen Morrissey, head of pensions analysis at Hargreaves.

“Annuities have been a big beneficiary of the rate hike cycle so far, with incomes rising in recent months to their best level in more than a decade.

“It’s not a foregone conclusion that annuity income will rise on the back of further interest rate expectations, but it’s a distinct possibility.”

What are the other annuity options?

Many people prefer to invest their retirement because if you do it right, your fund will continue to be replenished or even increased as you build income later in life.

If there is still something in your pot after your death, pensions are also a tax-efficient way of passing on assets to your loved ones.

> Read our 12-step starter’s guide to investing your pension for your retirement

The dilemma for people considering an annuity is that rates could easily go even higher, and if you buy now you could be stuck with less income than you could get in a few months.

But you are not obliged to annuate your pension in one go, you can make phased purchases and use annuities in combination with an invested pot.

We’ve previously explored how people can combine withdrawal and annuity in different ways to maximize retirement income.

> Do you want investment growth AND a guaranteed pension? Find out how here

Is an annuity right for you in your old age?

“A big advantage of an annuity is that it provides guaranteed income for life, regardless of market conditions,” said Andrew Barr, wealth planner at Aviva-owned Succession Wealth.

“It eliminates the need to manage investments and make investment decisions. This can be a stressful and time-consuming task, especially if someone considering a withdrawal is not well-versed in investing.

“Those with certain health conditions may qualify for an increased annuity.”

Barr says you can choose from a number of options from the get-go, such as:

• An income that increases every year to help you keep pace with inflation;
• Providing an income for your surviving dependents when you pass away;
• Build in a guarantee to ensure that your annuity is paid out to the beneficiaries if you die within a certain time.

“It should be noted that the options you choose in the beginning will affect the amount of income you receive, and the more guarantees you build in, the lower your income may be,” Barr says.

“Income is generally fixed and cannot be adjusted, so if your circumstances change when you retire and you need more money, you may need to look at other sources to supplement your income.”

Morrissey, from Hargreaves, says: ‘Annuities may not be the retirement powerhouse they were before the advent of retirement freedom and choice, but if you’re looking for a guaranteed income in retirement then they should be considered.

‘For years, income from annuities was low, but last year we saw a real revival in rates, partly due to the rise in interest rates.

“This means a lot more people are considering them as part of their retirement plan.”

What should you pay attention to when buying an annuity?

• You may be able to get an “increased” rate if you wait to buy an annuity until you are older and your health has deteriorated.
• You can rethink your investment-and-withdrawal strategy and later buy an annuity as a tandem or replacement source of income, but you can’t get out of an annuity once it’s purchased.
• If you’re healthy, the best rates are for singles, not inflation-linked annuities, but current cost-of-living pressures emphasize the importance of getting some protection from rising prices.
• If you buy a single, not a joint annuity, there will be nothing for your partner if you die first, so think about what they will have to live on and discuss this with them before making a decision.
• Many widows and widowers discover that their partner’s annuity choice has left them with no income after their death, forcing them to live on meager state benefits.
• Consider purchasing an annuity with a ‘warranty period’, which protects against the loss of (most of) your purchase money if you die shortly afterwards.
• You have to shop around for the best deals. The free government-backed Money Helper service has an independent annuity comparison tool here.