I see in the news that annuity rates are rising – is now the time to buy one?

I am 68 years old and enjoying the first years of my retirement. I am currently withdrawing money from my pension pot to provide me with a regular income. I also receive the full AOW.

Until now, I’ve avoided annuities because I’ve heard bad things about them. I don’t want to part with large amounts of cash in exchange for a pitiful income.

I do see in the news that annuity rates are rising. Is now the time to buy one? PC, Preston

Ruth Jackson-Kirby replies: For years, annuities have been a hard sell. While these retirement products should be tempting—you get guaranteed income for life—the low interest rates meant you had to say goodbye to a lot of money and see little in return.

But rising interest rates have also increased annuity rates. Annuity rates are now at their highest point in 13 years, making it another attractive retirement tool.

With an annuity, you pay a lump sum and then receive a fixed income for the rest of your life. How much you get will depend on a number of factors, including your age, health, and the annuity rates offered.

Companies tend to invest in government bonds to generate the return necessary to pay off the income from their annuities.

Recent interest rate hikes have increased bond yields, leading to an increase in annuity interest rates.

So 12 months ago, a 65-year-old could buy an annuity with £100,000 and receive an annual income of £4,900, according to wealth manager Hargreaves Lansdown.

Now a 65-year-old with the same amount to invest would get an annuity income of £6,637.

“Annuities were once the main factor in retirement income, but low interest rates have made them criticized for being poor value for money,” said Helen Morrissey, senior pension and retirement analyst at Hargreaves Lansdown. “These rising rates could encourage more people to think seriously about it.”

Although the offered income from an annuity has improved enormously, this does not mean that we have to go back to the time when people sunk their entire pension pot into it.

You’re already getting income from your pension pot, and you don’t have to give that up to buy an annuity.

One option is to use part of your retirement fund to purchase an annuity that will cover your basic living expenses. That way you can be sure that you will always pay your bills, while investing part of your pension so that it can continue to grow, and you can continue to receive income when you need it.

So take a look at your household budget and calculate how much you need to meet your basic needs. You said you enjoy the full state pension of £9,627.80 a year, so subtract that from what you need. You can then buy an annuity to cover the rest.

Another option is the ‘flex first, fix later’ approach. This is where you stick with what you’re doing now – and then buy an annuity later in life.

Phil Boyle, partner at financial firm LCP, says: ‘Pension liberties have allowed people to continue investing in their retirement, and in many cases this will give them a higher standard of living than buying an annuity once they retire.

Flex first, fix later can offer retirees the best of both worlds: the flexibility and growth potential of taking up early in retirement and the security of an annuity later on.’

There are several advantages to waiting until you are older before buying an annuity. You can invest your pension fund money and hopefully grow it in value.

Also, annuity rates are rising, so waiting can give you access to even better returns, even if you delay for only a few months.

You will also notice that as you get older you will be offered a higher annuity, especially if you have developed health problems. This is because the annuity provider knows that they will not pay out as long if they sell a policy to an 85-year-old than to a 65-year-old.

For example, LCP’s Boyle says that an 85-year-old who spends £100,000 on an annuity would currently receive an annual income of about £14,617.

There’s no limit on how many annuities you can buy, so you can buy one at early retirement to cover your basic household expenses — and another later in life if you want more financial security.