Annuity sales soar by 22% as interest rate hikes lead to better deals

Economy
By Liam

Annuity sales up 22% as more attractive rates entice people to give shunned retirement products a different look

  • The total amount paid out in annuities has reached its highest level since 2015
  • Rising interest rates mean that providers can afford to finance much more attractive deals
  • Now for £100,000 a healthy 65 year old can earn an income of around £6,790 a year

By Tanya Jefferies for Thisismoney.co.uk

published: | Updated:

Retirement income: Annuities provide secure income for life, and deals have improved after recent rate hikes

Annuity sales are up by a fifth to a four-year high as better deals drive more people to choose safe retirement income over investing their retirement.

Despite the benefit of guaranteed income until you die, annuities have been shunned for years due to poor rates and restrictive terms.

But the recent rate hikes mean providers can afford to finance much more attractive deals.

For £100,000, a healthy 65-year-old can now earn an income of around £6,790 a year.

About 16,250 annuities were purchased in the first three months of the year, according to the latest industry data, up 22 percent from the previous quarter and the highest number since the summer of 2019.

The amount paid out in annuities also reached £1.2 billion, figures from the Association of British Insurers show.

That’s the highest quarterly total since 2015, the year pension freedom reforms opened up the alternative option of keeping retirement savings invested for all retirees.

“Annuities are strongly linked to interest rates and the sharp increase in sales reflects the increase in interest rates over the past few months,” the ABI says.

While inflation is putting many households under financial stress, more people are inclined to buy annuities that protect them against rising prices rather than annuities that remain fixed for life.

The ABI figures show a 23 percent increase in sales of “escalating” annuities, which provide income that is directly linked to inflation or will increase by a fixed amount each year.

The shake-up of retirement freedom eight years ago prompted most savers to keep their money invested and live off withdrawals instead, but this involves monitoring a portfolio and exposure to the risks of the financial markets.

Here we’ve looked at the pros and cons of retirement versus annuities, and how you can combine investing your retirement with annuities for maximum benefit.

What annuity offers are available now?

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Annuities are paying out about 19 percent more than they did around this time last year, according to recent 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 just over £6,790 a year, more than the £5,690 you could have gotten in May last year, Hargreaves said.

Deals have also improved if you want options like living together – giving a spouse a survivor’s pension – and inflation protection.

Find out below what £100,000 will get you for different types of annuities and scroll down to see what to consider when making a decision.

Source: Hargreaves Lansdown industry averages, May 25

Source: Hargreaves Lansdown industry averages, May 25

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 buy an annuity later 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 left them with no income after their death, forcing them to live on meager benefits from the state.
  • Consider purchasing an annuity with a ‘warranty period’, which protects against the loss of (most of) your purchase money if you die shortly afterwards.

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