Have annuity offerings peaked? Interest rate cuts will reduce future offerings

Annuity deals have begun to lose value as providers anticipate a likely series of interest rate cuts by the Bank of England this autumn.

The headline inflation rate is hovering around its 2 percent target level, prompting policymakers to cut interest rates to 5 percent from 5.25 percent earlier this month.

For £100,000, a healthy 65-year-old can earn an annual income of just over £7,150 a year, but that figure is down from £7,270 in mid-June, according to Best Buy data (see below).

The Bank of England is likely to make two more interest rate cuts this year, according to Helen Morrissey, head of retirement research at Hargreaves Lansdown.

Higher interest rates mean annuity providers can fund more attractive offers, and he notes that annuity rates are below their peaks but still offer good value.

“As interest rates are expected to continue on a downward trend, annuity rates are expected to begin to fall in the coming months,” he said.

But he adds: “We don’t expect the Bank of England to cut interest rates as quickly as it raised them. Any fall in revenues should be much more gradual, so we shouldn’t feel under pressure to make a hasty decision.”

‘Once you buy an annuity you can’t undo it, so you should make sure you consider all relevant factors in your decision.’

Annuities provide a guaranteed income until you die.

But they were shunned for years because of low rates and restrictive conditions, and then gained a bad reputation due to annuity mis-selling scandals.

The 2015 pension freedom reforms encouraged most savers to keep their funds invested and live off withdrawals, despite the financial market risk that this entailed.

However, a series of interest rate hikes to combat inflation led to better deals and a resurgence in sales in recent years.

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

For the same sum, the same person with a spouse three years younger could buy a joint annuity with inflation protection but no guarantee providing £4,570 a year, according to the latest best buy data from Hargreaves (see below).

Annual annuity income from a £100,000 pension fund

Morrissey says: “When looking at a range of options, it is tempting to choose the one that offers the highest return at the outset. However, you need to consider all the circumstances.”

If you buy an individual life annuity but die before your spouse, he or she could be left with nothing, he notes.

It also says: “You are not required to annuitize your entire pension in one go. Annuitizing in stages will also allow you to benefit from higher annuity rates as you age.

‘You can use both income withdrawals and annuities in your retirement income strategy.

‘Annuities can be used to secure a guaranteed level of income to help you meet your daily needs, while the remainder can remain invested in income extraction where it has the potential to grow, and you can withdraw it as needed.’

Morrissey adds: “Be honest about your health. Including details about whether you smoke or have any medical conditions, such as diabetes, can significantly increase the amount you claim.”

‘Details such as whether you have suffered a stroke could increase your income by over £8,400 a year, while someone who smokes ten cigarettes a day could receive more than £7,600.’

Here are some tips from Money on what to consider before buying an annuity, or you may want to check out the guides below.

> Read a 12-step guide to investing your pension

> Find out how to combine investment drawdown with an annuity

> Check how much an inflation-linked annuity costs extra