Annuities could see a boost if interest rates are raised tomorrow, but this is unlikely to make the guaranteed income product more attractive to savers unless the rate hike is significant, advisers have said.
Annuity rates have been on a downward trend since 2019, though there have been signs of improvement in the past year.
If the Bank of England chooses to raise interest rates above the current 0.1 per cent level tomorrow (November 4), this could give annuities a further boost.
According to figures from Hargreaves Lansdown, average annuity income on a £100,000 pension for those aged 75 was £6,975 in October 2019, dropping to £6,724 the year after.
However, annuity rates have started to bounce back with the same person receiving £7,132 in October 2021.
Annuity rates are calculated with reference to the yields on long-term fixed interest investments such as corporate bonds and long term gilts. Generally speaking when interest rates rise so do gilt yields.
But advisers have said any base rate rise would need to be significant to make a difference in saver's attitudes to annuities.
Ricky Chan, director and chartered financial planner at IFS Wealth and Pensions, said: “Annuity is always a consideration but the increase in rates is unlikely to be significant enough for annuities to be an attractive default option for many.”
Billy Burrows, retirement director at Better Retirement Group, said the yield on 15-year gilts was a useful benchmark for annuity rates.
Burrows said: “Currently the benchmark yield is 1.19 per cent which is still at an historically low level. The yield was at its lowest in summer 2020 when it fell to 0.5 per cent. Before then the lowest point was after the 2016 EU referendum when the yield fell to 1 per cent.
“The benchmark annuity, £100,000 joint life 2/3rds for ages 65 and 60 with level payments is currently £4,141 per annum gross compared to £3,861 in Summer 2020 and £3,823 after the 2016 referendum. This means the benchmark annuity is only £300 a year higher than [at] the low point.”
Burrows said if gilt yields surprised expectations and rose to 2 per cent the benchmark annuity might rise to about £5,000.
“So annuity rates will rise if interest rates rise but any increase will be measured in a few hundred pounds per annum,” Burrows said.
“Whilst any rise is welcome, it is unlikely to make annuities much more attractive.”
He added for annuities to be a “serious competitor” to drawdown the underlying yield would need to be above 2 per cent and the income from the benchmark annuity to be well above £5000 per annum gross, but there was no sign of that at this stage.
Tom McPhail, director of public affairs at the Lang Cat, agreed annuities may not become more popular among younger retirees but could attract the attention of the older cohorts.
McPhail said: “I can’t see many 60 somethings buying into an annuity, even if rates edge upwards; however for those in their 70s or 80s who might now be looking at rates of 7 per cent or more, that kind of return combined with the security of eliminating the longevity risk may become more popular.”
amy.austin@ft.com
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