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Average annuity rates leap 50% since start of the year

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05/10/2022
The average annuity rate has reached a 14-year high, having increased 52% in the past nine months.

Annuities provide holders with a guaranteed income for life. A benchmark annuity of £100,000 at age 65 would now pay a guaranteed income of £6,873 a year. This compares to £4,521 at the start of 2022.

The data from Canada Life reveal the point at which customers would receive their original pension back through income – the break-even point – has reduced by seven years, falling from 22 to just 15 years.

Meanwhile, the financial services firm also found that inflation-linked annuity rates have seen a significant improvement over the last nine months, with rates improving 77%.

A benchmark £100,000 annuity linked to RPI for a 65-year-old will now pay a starting income of £3,896, compared to £2,195 at the start of the year.

Why are annuity rates rising?

It’s all down to the increase in the gilt yield. Canada Life explains that back in January the 15-year gilt yield was around 1.15%. Given the increasingly inflationary pressures and the war in Ukraine this has been steadily increasing through the year to stand at around 3.5% in mid-September.

However, following the mini Budget and the market turmoil in its aftermath, gilt yields skyrocketed to nearly 5%, before the Bank of England stepped in with emergency gilt purchases which eased it back down. It is currently around 4.2%.

Record-breaking year for risk-free income

Nick Flynn, retirement income director at Canada Life, said: “It’s has been a record-breaking year for annuity rates, with incomes at a level we haven’t seen for over a decade. I’d need to look back to before the banking crisis of 2008/9 to see annuity rates at a similar level as today.

“In the current economic climate, where else could you receive nigh on 7% risk-free income in retirement? That is how strong annuity rates are right now which is why they are worth more than just a second glance.

“With the right guarantees and value protection options, annuities can now give drawdown a good run for their money through the benefits available. Individuals planning their retirements or looking to de-risk their investment portfolios should take another look at annuities.”

Flynn added that people should also look at using annuities alongside drawdown, rather than viewing in isolation or having “all your eggs in the one basket”.

“Phasing annuity purchases throughout retirement can not only de-risk your retirement journey, but you can also benefit from better annuity rates as you get older. With the right value protection, you can also ensure your wealth is protected and can be passed to loved ones.

“Anyone considering their retirement options should consult the expertise of a specialist annuity broker or the advice of a regulated financial adviser, before making any decisions.”

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