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Annuities ‘back in fashion’ as rates rise and break even point falls
Guest Author:
Peter TabernerSignificant improvements in annuity rates over the past year and a half have brought forward the break even point from an investment by five years.
The break even is the point at which savers receive their original investment back through income.
New research from Canada Life discovered that more people are experiencing no losses on investments over a shorter period of time.
Overall, the net result of the improvements of the annuity rates means that the payback period on a benchmark £100,000 annuity is now 14 and a half years. For a 65-year-old, this generates an income of £6,907 a year.
This is over £1,500 more than the £5,240 that the same annuity was paying five years ago, with a break even point of 19 years. Also, the same annuity paid an income of £5,670 a year ago, with a pay-back period of 18 years.
At present, the research found that a benchmark annuity for someone aged 65 with no pre-existing health or lifestyle conditions would be around 6.9%. The annuity rate can increase significantly if certain lifestyle conditions are admitted such as diabetes, high blood pressure or being a smoker.
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Separate research on annuity rates by investment platform Hargreaves Lansdown found that recent annuity rate rises are boosting annual pension income by 20%.
Annuities ‘back in fashion’
Nick Flynn, retirement income director at Canada Life, reflected: “It’s been a long time coming but annuities are firmly back in fashion, driven by the significant improvement in rates.”
“This is evidenced by the break-even point, the tipping point at which you receive your original investment back through income. This has moved forward by nigh on five years, which shows just how much the market has moved in a relatively short space of time. Annuity rates are currently at levels not experienced since the banking crisis of 2008/9, which shows just how far we’ve come.
“It’s difficult to predict where annuity rates will go, but markets have already priced in interest rate movements, while yields on gilts have stabilised.
“Considering your retirement choices shouldn’t be a binary decision between annuity and drawdown. Rather than adopting an either-or approach, you can consider blending annuity and drawdown to provide the best of both worlds, a risk-free retirement income and flexibility.
“Annuities can also be bought in tranches as you move through retirement, securing a better rate as you age. Working with a regulated financial adviser or consulting an annuity broker will ensure you consider all of your options and keep your retirement plans on track.”