After years on the retirement income side lines, the higher-interest-rate environment ushered in a golden era for annuities as income soared.
They’ve since fallen back from their highs. But, currently, a 65-year-old with a £100,000 pension is still able to get up to £7,104 per year from a single life level annuity, according to Hargreaves Lansdown.
The Bank of England looks likely to make two more interest rate cuts by the end of the year. Interest rate cuts could lower bond yields, and therefore annuity rates too.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “With interest rates set to continue on a downward trend, the expectation is that we will see annuity rates start to fall back in the coming months.
“It’s also important to say that we aren’t expecting the Bank of England to cut interest rates anywhere near as quickly as they raised them. Any falls in income should be much more gradual so you shouldn’t feel pressured into making a snap decision. Once bought, an annuity cannot be unwound, so you need to make sure you are considering all relevant factors in your decision.”
Here are five key factors to consider when purchasing an annuity.
You don’t have to annuitise at once
You are under no obligation to annuitise all your pension at once. You could be retired for 20 years or more and your circumstances could change massively in that time.
Annuitising in stages will also enable you to benefit from higher annuity rates as you age.
You can buy an annuity and use income drawdown too
You can utilise both income drawdown and annuities in your retirement income strategy – you don’t have to pick one or the other.
Annuities can be used to secure a level of guaranteed income to help you meet your day-to-day needs, while the rest of your pension pot can remain invested in income drawdown, where it has the potential to grow, and you can draw down as needed.
This can be a great way of harnessing the guarantees that come with annuities with the flexibility of income drawdown.
Check the whole market
Once an annuity is bought, it cannot be unwound, so make sure you compare the whole market before you take the plunge.
Using an annuity search engine will enable you to input your details and get a range of options from the different providers, so you can choose the option that best meets your needs.
Provider quotes can differ by hundreds of pounds per year, which could amount to thousands of pounds over the course of a retirement.
Consider all your circumstances
When looking at a range of options, it’s tempting to choose the one that offers the highest income at outset. However, you need to consider all your circumstances.
A 65-year-old with a £100,000 pension may be able to get up to £7,104 per year from a level single life pension, but if they were to die, their spouse could be left with nothing.
A joint life annuity can deliver up to £6,493 per year, according to Hargreaves Lansdown’s annuity search engine. Although this is a lower income, it gives you the peace of mind that if you were to pre-decease your spouse, then they would continue to get an income.
Be honest about your health
With an annuity, it pays to be honest when it comes to your health conditions.
Including details as to whether you smoke or have a condition such as diabetes can push up how much income you receive.
Recent data from Hargreaves Lansdown’s annuity search engine shows that including details such as whether you have had a stroke could push your income to more than £8,400 per year, while someone who smokes 10 cigarettes per day could receive more than £7,600.
