Annuity rates have hit a record high, with a 65-year-old owning a £100,000 pension now able to get up to £7,882 per year from a single life level annuity with a five-year guarantee, some 63% higher than the rate on offer five years ago, according to data from Hargreaves Lansdown.
Inflation-linked annuities are also on the rise with one that grows 3% currently offering up to £5,786 per year.
This is a favourable change from last month, when annuity rates were at a 20-year high but behind those offered in 2008. This month’s reading has broken through this previous all-time high.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Annuity incomes have been a ray of sunshine for retirees in these turbulent times. These increases are welcome news for anyone in the market for a guaranteed income in retirement and have contributed to a real revival in a market that was once considered on the edge of extinction.”
Although current rates “will continue to fuel interest” after a bumper 2024, there are “clouds gathering on the horizon”, she warned.
The expectation is that the Bank of England will cut interest rates in May and may look to reduce them still further in its bid to improve weakening economic growth forecasts, which have taken a hit since US president Donald Trump’s ‘Liberation Day’ tariff upheaval.
“Such a move could well put downward pressure on annuity incomes and so we could see them falling back over the coming months,” said Morrissey.
Savers should not panic, however, as interest rates are not expected to fall as quickly as they were raised, because inflation remains the main goal for the central bank.
“And we are not expected to see a return to interest rates anywhere near as low as we saw in recent years so we aren’t expecting annuity incomes to return to the much lower levels they hit a few years back,” she added.
For those considering taking out an annuity, Morrissey said it is important to shop around as different providers offer different rates, with some offering thousands of pounds more than others.
Additionally, savers do not need to annuitise all of a pension at once and can do so in stages, meaning they can secure guaranteed income as needs change and leave the rest invested.
“As you age you will also be able to secure incomes at higher rates and if you have developed a condition that qualifies you for an enhanced annuity then you will get a further bump in income,” she concluded.