Last week, average annuity rates hit a 14-year high, having increased by 52 per cent in the past nine months, according to data from Canada Life.
This means the break-even point, the point at which an individual would receive their original pension back through income, has reduced by seven years, falling from 22 years to just 15 years.
The firm explained that a benchmark annuity of £100,000 at age 65 would now pay a guaranteed income of £6,873 a year. This compares to £4,521 at the start of 2022.
However, Steve Perera, chartered financial planner at Britannic Place Financial Management said even with the recent increases in annuity rates, the decision as to whether or not to purchase an annuity remains an extremely personal one.
“Some people suggest that you might want to purchase an annuity in order to have a secure income to cover life's essentials,” he said.
“However, most people have this to some extent already in the form of their inflation-proofed state pension.
“Whether you need a greater level of secure income will largely depend on what your level of expenditure is, what other assets you have and also what sort of legacy you want to leave for your beneficiaries.”
Perera added: “As ever, personal finance is more about the personal than it is the finance."
Annuities fell out of favour in the past decade or so due to low interest rates and the introduction of pension freedoms in 2015 but with interest rates having increased recently, annuities are becoming an increasingly attractive option for people who take regular income from their drawdown pension.
Inflation-linked annuity rates have also seen an improvement over the past nine months, with rates improving by 77 per cent.
Although annuities lack the much-favoured flexibility of drawdown, they do offer certainty to clients and much less admin for them going forward. Samuel Mather-Holgate, Mather & Murray FinancialFabian Taylor, partner and chartered financial planner at Page Kirk Financial Services, said: “Annuities provide a guaranteed income for life, which removes the uncertainty of whether a drawdown pension will last throughout retirement.
“However, annuities lack the flexibility of drawdown. Using a mixture of drawdown income and annuities could be the best option for the majority of retirees.
“The annuity could cover essential expenditure, such as household bills, while drawdown could be used to cover discretionary expenditure, such as eating out at restaurants or going on holiday.”
Taylor explained that with additional interest rate rises by the Bank of England likely, annuity rates could increase further.
“So the dilemma for people considering an annuity now is that rates could be higher in just a few months’ time,” he said.
“A way around this dilemma could be to buy annuities in stages, securing income to meet the expenditure requirements as you need it.”
He explained that this strategy allows the individual to benefit from better rates as they get older, as well as potentially being eligible for an enhanced annuity, which offers higher income for people with serious health conditions.
Lack of flexibility
Samuel Mather-Holgate of Swindon-based advisory firm, Mather & Murray Financial, explained that with annuity rates at this level, and still continuing to rise, clients are considering this option more readily.
“Although annuities lack the much-favoured flexibility of drawdown, they do offer certainty to clients and much less admin for them going forward.
Most people will benefit from some kind of annuity within their retirement plans because they offer a known, stable income. Alex Shairp, Blackmount Private Wealth“I would expect clients to take a more holistic approach to their retirements, where their essential spending commitments might be met by an annuity and the remaining pension savings kept in drawdown should they choose to use it, or leave it as a legacy."
Likewise, Alex Shairp, founder at Glasgow-based Blackmount Private Wealth said annuities play a vital role in retirement planning.
Their decline in popularity was driven by a combination of low annuity rates and people's biases towards the flexibility offered by income drawdown, he explained.
Shairp said: “Post-pensions freedom in 2015, drawdown became a default option for many financial advisers.
“It was easy to sell the dream of a flexible retirement, while keeping clients' funds invested. This has undoubtedly led to poor outcomes for retirees.”
However, since 2014, advisers have been airing their concerns over drawdown misselling, a year before tax rules for drawdown were made more flexible in 2015.
Earlier this month, the Financial Conduct Authority said it was "increasingly turning" its focus to retirement income strategies following its work on defined benefit pension transfers in recent years.
The regulator said it is keen to understand more about it and is in the “evidence gathering” stage, harbouring concerns over the size of the market, the amount of money, and the decision making process.
Shairp said: “The FCA is now turning its attention from defined benefit pension transfers to retirement income advice. Uptake of annuities in recent years is central to the regulator's concerns.
“Most people will benefit from some kind of annuity within their retirement plans because they offer a known, stable income. The annuity is an option everyone should consider.”
He explained that with annuity rates on the rise, it becomes more important and more attractive to do so.
“If people approaching retirement, or those already there, are unsure of how to evaluate an annuity, they should seek independent financial advice,” he added.
sonia.rach@ft.com
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