Annuity sales soar to their highest level in years as savers are tempted by deals worth more than 7%

By Liam On Feb 16, 2024

Sales of annuities rose 46 per cent to £5.2bn last year after a strong recovery in the pension income they can buy, new industry figures show.

The number of annuities purchased rose by a third to 72,200 as interest rate increases led to providers offering much better deals.

For £100,000, a healthy 65-year-old can maintain an income of over £7,000 a year, according to Best Buy data (see below).

Annuity sales: The recent series of rate hikes to combat inflation means annuity providers can afford to finance much more attractive deals

Annuity sales reached their highest level in 2023 since pension freedom reforms in 2015 saw most retirees living off invested funds in old age.

The trade body, the Association of British Insurers, says sales reached £1.5 billion in the final quarter of the year, following a strong third quarter when sales reached £1.4 billion.

> Should you buy an annuity? Find out below what you should take into account

Annuities provide a guaranteed income until you die.

But they were shunned for years because of poor rates and restrictive terms, and after developing a bad reputation due to scandals surrounding annuity sales.

The 2015 pension freedom reforms prompted most savers to keep their money invested and live on withdrawals instead, despite the associated financial market risk.

However, the recent series of rate hikes to combat inflation means annuity providers can afford to finance much more attractive deals, leading to a revival in sales.

Industry figures show that £100,000 for a healthy 65-year-old can now buy a retirement income of around £7,120 per year, with no inflation protection and a five-year guarantee period, protecting your money immediately after purchase.

For the same amount, the same person with a spouse three years younger could buy a joint annuity with inflation protection but no guarantee that would earn £4,640 a year, according to the latest data from Hargreaves Lansdown (see below).

Source: Best buy industry figures from Hargreaves Lansdown, February 15

The ABI says: ‘With six providers offering annuities to new customers, 64 percent of annuity buyers in 2023 were also looking around and taking an annuity from a different provider to the one they had kept their pension savings with.

‘However, only 29 percent of customers who purchased an annuity did so with the help of professional advice.’

Emma Watkins, director of pensions at Scottish Widows, said: ‘With defined contribution pensions becoming the main source of private retirement savings, recent volatile market conditions, combined with greater awareness of the higher annuity rates currently on offer, have made annuities even more attractive. , especially in light of pressure on the cost of living and the trend towards people living longer.

‘In 2023, this was caused by continued interest rate increases, leading to better deals in the annuity market. Because interest rates appear to remain higher for longer, the attractiveness of annuities will continue.’

ABI figures: Around 353,000 annuities worth £11.9 billion were sold in 2013, before pension freedom reforms opened up the option to keep your pot invested instead

What is pension freedom?

Reforms in April 2015 gave people over 55 more control over their pension pots.

Major changes included eliminating the need to purchase an annuity to generate income until you die, giving access to investment and withdrawal programs previously limited to wealthier savers, and abolishing a “death tax” of 55 percent on pension pots that remained invested.

The changes apply to people with ‘defined contribution’ or ‘money purchase’ pension schemes, where contributions from both the employer and employee are collected and invested to provide a pot of money upon retirement.

They do not apply to people on more generous gold-plated final salaries or ‘defined benefit’ pensions that provide a guaranteed income in retirement.

If you have a final salary pension and want to benefit from pension freedom – and the option to leave your pot to children and grandchildren – you can transfer it to a withdrawal scheme.

However, it is mandatory to first obtain paid professional financial advice if the transfer value is £30,000 or more.

Pete Cowell, head of annuities at Standard Life, said: ‘Annuities have benefited from rising interest rates and it is clear that clients and advisers are responding and seeing the benefits of guaranteed income as part of the wider mix of retirement income solutions.

‘It’s important to remember that retirement income planning doesn’t have to take a ‘one and done’ approach. Although an annuity cannot be changed once it is set, there are different annuity options available and different ways in which annuities can be used.

‘Annuities can also be purchased in stages during retirement or later in life, to help combat the effects of inflation on hard-earned savings.

‘People need to remember how important it is to shop around when looking for the best price.

‘While people can always consult a financial advisor to help them make decisions about which annuity types are best suited to their needs, there is also free impartial guidance available from Pension wisea service from MoneyHelper.’

> Should you buy an annuity? Below you can read what you should pay attention to. Discover how you can invest your pension and how you can combine pension accrual with annuities.

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 purchase an annuity as a tandem or as a replacement source of income, but you cannot get rid of an annuity once it is purchased.

If you’re healthy, the best rates are for single life insurance, not inflation-linked annuities, but current pressures on the cost of living underline the importance of getting some protection against rising prices.

If you buy a single annuity, and not a joint one, there is nothing for your partner if you die first. So think about what he or she will have to live on and discuss this with him before you make 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 benefits.

Consider purchasing an annuity with a ‘guarantee period’, which protects against the loss of some or all of your purchase money if you die shortly afterwards.

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