Home Money Is it time to buy an annuity? Turbulence in British bonds raises rates to almost 7.5%

Is it time to buy an annuity? Turbulence in British bonds raises rates to almost 7.5%

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Source: Hargreaves Lansdown Best Buy industry figures, January 16

Annuities provide a guaranteed income until you die, and recent upheavals in the bond markets are allowing providers to offer much better deals on these products.

Higher borrowing costs are a headache for the Government, but they also mean higher yields for institutions willing to buy UK bonds, known as gilts.

That allows pension companies to finance more attractive rates for people who want a secure income from an annuity in old age.

Annuities are a large, long-term purchase and you can’t change your mind later, so they’re not something you can buy on a whim after a market upheaval.

But if you were willing to consider one anyway, perhaps to run alongside your invested pension pot, it’s worth checking current rates.

For £100,000, a healthy 65-year-old can earn an income of almost £7,500 a year, according to data from Best Buy (see below).

In the same scenario and for the same price, a single annuity that grows at 3 per cent a year and has a five-year guarantee period (protecting your cash immediately after purchase) can generate £5,400 a year.

The same person with a spouse three years younger could buy a joint inflation-protected but unsecured annuity providing more than £4,800 a year, according to the latest industry data from Hargreaves Lansdown.

Source: Hargreaves Lansdown Best Buy industry figures, January 16

What should you take into account when purchasing an annuity?

The pension freedom reforms of a decade ago have encouraged most savers to keep their pension funds invested and live off the withdrawals in old age.

Annuities were shunned for years due to low rates and restrictive conditions, and after earning a bad reputation following annuity mis-selling scandals.

Now that there’s been a resurgence in annuity rates, here’s what you should think about when deciding if they’re right for you.

– You may be able to get an “improved” rate if you wait to buy an annuity until you are older and your health has worsened.

– You can think again about your investment and drawdown strategy and purchase an annuity altogether or as a replacement income source later, but you cannot exit an annuity once purchased.

– If you’re in good health, the best rates are for single living, with no inflation-linked ‘level’ annuities, but current pressures on the cost of living highlight how important it is to get some protection against rising costs. prices.

– If you buy a single, non-joint annuity, there will be nothing for your spouse if you die first, so consider what they will have to live on and discuss it with them before making a decision. Many widows and widowers find that their partner’s annuity option has left them with no income after their loss, forcing them to live on meager state benefits.

– Consider purchasing an annuity with a ‘guarantee period’, which protects you against losing all or most of your purchase money if you die shortly afterwards.

– If you need to purchase a long-term care annuity or an immediate needs annuity to cover your own care costs or those of a loved one, and the money is paid directly to the company providing the care, that income will be free of taxes.

– You should compare prices to find the best deals. The free, government-backed Money Helper service has a Independent annuity comparison tool here.

Is it time to buy an annuity? What do money experts say?

“As the value of gilts falls, their yield rises, driving up annuity rates,” says Helen Morrissey, head of superannuation research at Hargreaves Lansdown.

“The turmoil in bond markets has caused annuity income to soar, providing an additional boost to a market that has already enjoyed a stellar year.”

She expects interest in annuities to continue to rise, but cautions that it’s important to look before you leap and that you don’t need to annuitize all of your pensions at once.

‘You can take a flexible approach and annuitize in stages throughout your retirement as your needs evolve. This means that the remaining fund can remain invested in the income drawdown, where it can grow while you gain the potential to take advantage of higher annuity income as you age.’

Pensions experts: from left, Helen Morrissey, Tom Selby and Nick Flynn

Pensions experts: from left, Helen Morrissey, Tom Selby and Nick Flynn

Tom Selby, director of public policy at AJ Bell, says: “Annuities languished throughout the 2010s, partly because bond yields (which largely determine the rates offered by insurers) remained persistently low.

“The flexibility available to retirement investors has also proven very popular since pension freedoms were introduced in 2015.”

He says rates have improved dramatically since the Truss-Kwarteng mini-Budget, adding that “annuities are likely to move onto the radar of millions of retirees who may have previously dismissed them as of little value.”

Selby suggests people ask themselves five questions when choosing an annuity or a reduction, or a combination to provide an income in old age.

1. How much do you value flexibility over security?

2. Are you willing to invest or would you prefer not to intervene?

3. Could your income needs change in the future, because if they fluctuate then the reduction could be attractive?

4. Are you in good health because otherwise you could get a better “improved” annuity rate?

5. What are your priorities in the face of death? Leave money to your loved ones?

Source: Canadian Life

Source: Canadian Life

Nick Flynn, director of retirement income at Canada Life, says: ‘Additional government spending, global uncertainty and higher taxes are contributing to the recent rise in the cost of government borrowing.

“While there are no absolute guarantees, if this trend continues, it is very possible that annuity rates will remain the same or even increase in 2025.

‘Annuities offer people security and a guaranteed income for life. However, it is important to seek advice from an annuity specialist or regulated financial advisor who will be able to help you find the best annuity product for you, which will also include potentially broader benefits for your spouse or loved ones.

“Either way, be sure to shop around to find the best option rather than accepting your current insurer’s offer, as the decision to purchase an annuity is irreversible.”

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