Interactive Investor

Annuity rates hit two-year high

5th March 2018 13:20

Rachel Lacey from interactive investor


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There is positive news for retirees seeking to purchase a guaranteed income as annuity rates reach a two-year high.

The news coincides with the launch of new rules from the Financial Conduct Authority that force providers to quote rivals’ quotes.

According to figures from Hargreaves Lansdown, the best rate for a 65-year old in good health with a £100,000 pot is £5,387, up from £5,370 two years ago.

Annuity rates have been on a downward trend for many years as life expectancy increased and interest rates fell, reducing the income providers are able to generate from their investments. However, they also took an additional hit immediately after the Brexit vote as gilt yields plummeted.

Andrew Tully, technical director at Retirement Advantage says: “Annuity rates hit a market low shortly after the vote to exit the EU, as gilt yields, which annuity companies invest the assets in, tumbled. But over the past 18 months, we’ve witnessed a slow but steady improvement in rates, largely driven by improving gilt yields but also market pressures as companies compete for business. This is good news for people who are looking for the 100% security of a guaranteed lifetime income in retirement.”

However, Nathan Long, senior pensions analyst at Hargreaves Lansdown points out that there are some nuances in the wider figures, with rates not rising for all buyers. For example, a 60-old buyer would only get £4,738 today compared to £4,919 in February 2016. Rates were also lower for buyers in their seventies.

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Mr Long says: “We attribute this to two things. The rates offered by annuity providers for those aged 65 need to be competitive as it remains a popular point to buy an annuity. While the age of accessing is widespread and will become increasingly so, there is still some small element of anchoring to state pension age.”

He adds: “Secondly, the introduction of more sophisticated underwriting means more than half of people now qualify for a higher income due to their health or lifestyle. This is particularly true with those who are older as any health conditions have had time to manifest themselves. As a result, the rates for those in good health are not quite as competitive because they are held back by the insurers’ need to pay higher incomes to those who are not expected to live as long.”

While there is frequent movement in annuity rates, often month to month, experts agree that it is difficult to accurately time an annuity purchase. Instead, buyers are advised to shop around to make sure that they get the best rate.

Mr Tully adds: “Never accept the offer from your pension company for your annuity. It will always pay to shop around the open market, much like you would with your insurance or utility bills, to ensure you get the best deal from your annuity. The difference in income can result in thousands of extra pounds income over the course of your retirement.”

Rates: Source: Retirement Advantage Annuity Index (£50,000 purchase price, level income, no guarantees, average market rates)

This article was originally published in our sister magazine Moneywise, which ceased publication in August 2020.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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