Annuities 'back on the agenda' after rates rise

Pension savers are continuing to choose annuities for some or all of their retirement income, following a surge in sales last year as interest rates increased.

Offering a guaranteed income for life, annuities are among the options for people to consider at and during retirement, alongside a pension drawdown plan, which involves taking income withdrawals directly from your pension pot while leaving the rest invested.

2023 will be remembered as "the comeback year for the humble annuity", Nick Flynn, retirement income director at Canada Life, told FT Adviser.

Annuities were previously seen as inflexible and poor value, Flynn explained. However, they are now "firmly back on the financial planning agenda" due to higher rates as well as savers looking for income security amid economic uncertainty.

Rates up 54%

Figures from Canada Life show that annuity rates have jumped by 54% in just two years, driven by rising interest rates and the returns available on gilts.

As a result, over the course of a 20-year retirement, an annuity at currently available rates would provide around £49,200 extra income compared to an annuity sold in January 2022.

Consumers are seeking a "mix and match" approach by combining annuities with drawdown, Flynn noted. This balances the need for security with flexibility, and can often generate a better retirement income.

Different types of annuity

Further options to consider when thinking about annuities include inflation-linking, securing full payback with value protection, and an annuity that continues to pay an income to your spouse or partner after your death.

Level annuities pay out the same amount each year, while escalating annuities have a lower starting income but the amount paid out rises each year at a fixed rate or in line with inflation. However, although index-linking protects your annuity against inflation, the payback period is longer and you should consider your particular circumstances to decide which is best.

Short-term or fixed-term annuities are an alternative to lifetime annuities, and could for example allow you to use part of your pension pot to buy an annuity that provides a short-term income and leave the rest invested. You could still choose to buy a lifetime annuity subsequently. A longer fixed term of up to 30 years will provide income to you and/or your partner for the full term of the agreement.

Value protection can ensure that up to 100% of the original cost of the annuity is paid out to beneficiaries if the annuity holder dies prematurely.

Joint-life annuities provide an income to your spouse or partner, or any other named beneficiary, after you have died, for the rest of their life. This can help to support a loved one who may not have much retirement provision of their own.

Impaired or enhanced annuities pay out a higher income if an existing health condition or lifestyle factors may shorten your lifespan.

Shop around for the best deal

Because of the range of annuity options and providers on the market, it's important to seek professional advice to help you find the right deal for your unique circumstances and requirements.

A regulated financial adviser or independent annuity broker will help you 'shape' your annuity so that you get the right options for your circumstances in terms of capital and inflation-protection, explained Stephen Lowe, group communications director at retirement specialist Just Group. They will then help you shop around for the most competitive rate among providers, taking into account your health history and lifestyle details.

"Most annuity buyers will receive higher income by taking the time to properly shop around for the best deal," Lowe added.