Annuities emerge from doldrums as interest rates rise in UK

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After a decade in the doldrums, annuities – a guaranteed income for life bought with a pension pot – are now at a 12-year high. This means a 65-year-old with a £100,000 pension pot could now get an annuity income of £6,637, according to investment platform Hargreaves Lansdown. Last year they would have received around £4,900.

Financial advisers have reported growing interest in annuities in recent months, as interest rates rise and markets prove volatile.

But they also warn they need to be entered into carefully as “buying an annuity is final – there are no refunds”.

Samuel Mather-Holgate of advisory firm Mather & Murray Financial, said: “In recent months, the way clients access their pension savings at retirement has started to change. Rising interest rates, coupled with volatile investment markets, have led to demand for annuities.

“With interest rates continuing to rise, we’re predicting a further increase in annuity rates and even more pensioners opting to access their pension savings via an annuity.”

Annuities have fallen out of favour in recent years in part because of the introduction of pension freedoms in 2015 which opened up more options for retirees. Prior to that, buying an annuity was the only option for most people with a defined-contribution pension.

Demand for annuities also wilted due to record low interest rates. The rates offered by annuity providers are determined by long-term gilt yields which are affected – among other things – by the Bank of England’s base rate.

There have now been seven consecutive interest rate rises since last December as the central Bank battles soaring inflation.And gilt yields have soared this year, with the key 15-year gilt surging towards five percent this week before the Bank of England’s intervention.

This has boosted the annual incomes retirees can get from lifetime and fixed-term annuities.

However, Tim Mottram of Grey Parrot Financial Planning, said: “A wrong assumption is made if you advise a client to buy an annuity at 65, namely that they will need the same income for the rest of their life.

“In 2022, there is around a 1 in 10 chance of living to 100. Retiring at 65 and buying an annuity would mean 35 years tied to the same income. From experience, retirees want to spend more earlier and less later on. Annuities are perfect post 80/85, when people become less active. Buying an annuity is final.There are no refunds.”

Helen Morrissey of Hargreaves Lansdown, said: “A good approach could be to annuitise in stages. This gives you the opportunity to secure higher rates as you age, and you may also qualify for a further boost through an enhanced annuity if you later develop a medical condition.”

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