Pensioners approaching retirement at the onset of the pandemic saw their retirement savings hit by market volatility, while average annuity incomes fell to their lowest level on record in the first three months of 2020.

Since pension freedoms were introduced in 2015, annuity income fell for five out of the six years to 2021, with growth not seen across the market for a full year since 2017 – which was just 1%  – according to Moneyfacts data.

But rates are starting to climb, and according to wealth, insurance and asset management firm Canada Life, it said its annuity rates have gone up seven times this year – around 36%.

Its data revealed a £50,000 pension pot would have bought a 65-year-old an average annual income of £2,322.84 in January 2020.

In January this year, that same £50,000 pot would have given a 65-year-old an average annual income of £2,286.12 – slightly lower than the pre-pandemic figure.

But as of May 2022, this would now see an average annual income of £2,675.76 – nearly £400 more per year in just four months.

Meanwhile, Hargreaves Lansdown found that in April 2021, a £100,000 pension pot would have got a single life level annuity income of £4,882 a year. But now, those approaching retirement could get an income closer to £5,700.

What’s driving the increase in annuity rates?

Andrew Tully, technical director at Canada Life explained that a significant part of the money backing annuities is invested in longer-term gilts.

“As these move up – partly driven by increases to the Bank of England base rates – then annuity incomes increase. The market fully expected the interest rate hike last week and the majority of movements in annuity rates had already factored this in,” Tully said.

Steven Cameron, pensions director at Aegon, said annuity providers can offer better rates if they can make higher returns on ‘safe’ investments such as long gilts.

“The change in the base rate won’t directly lead to better annuity rates, but if the trend is towards higher interest rates or yields on long gilts, then that would be good news for those considering buying an annuity,” he said.

However, Cameron added that the Bank of England’s quarter of a per cent increase to the base rate last week “won’t make a huge difference”.

But according to Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, yesterday’s Queen’s Speech offered a “glimmer of hope on the horizon for those wanting to include annuities in their retirement income strategy”.

She explained that it’s to do with ‘Solvency II’ reform and the government’s aim to revoke EU regulation governing the financial services industry so it has a more UK-specific approach.

Morrissey said: “Its introduction [Solvency II] in the aftermath of the global financial crisis was designed to make sure insurers were well capitalised but was met with concern that it would depress annuity incomes. The ongoing government review said reform could result in a material release of as much as 10%-15% of the capital currently held by life insurers unlocking potential to invest billions of pounds in long-term assets.

“Such change could lead to a bounce in incomes which have already been on the rise in recent months as interest rates increase.”

Is now the time to consider an annuity?

An annuity is a guaranteed income for life, and with rates on the rise, Tulley said many people are generally “only interested in the top rate”.

Knowing how much you can get each year until death gives many people peace of mind and security, particularly now amid the cost-of-living crisis and soaring inflation.

And for those with lifestyle and health conditions, better rates may be offered as part of an ‘enhanced annuity’.

However, even though average rates have increased, it’s vital to compare deals as rates can vary from provider to provider. Remember, these rates are locked in – a pension annuity can’t be changed or cashed in.

It’s important to consider other retirement income options too, so seek advice from a financial adviser.

Morrissey added: “If you need a guaranteed income then it could be a good idea to annuitise in slices over time, rather than all at once, depending on your need.

“This means your pot isn’t completely exposed to annuity rates at any particular point and you can potentially benefit from higher rates in future through an enhanced annuity.”

RELATED: See YourMoney.com’s Five questions you should ask before buying an annuity for more information.