Disclaimer – Annuities are not for everyone and every situation. The tax regime can also change. This is not an inducement to commence an annuity or to invest. You should contact a qualified financial adviser to discuss whether an annuity would be right for you.
In the current economic climate, annuities have looked even more attractive than in recent years.
Rates have increased by 48% since the beginning of 2022. This means a 65 year old client with a £100,000 pot could receive over £25,000 more in their lifetime! Annuity rates increase by 20% in the last twelve months adding over £25,000* to lifetime income (standardlife.co.uk)
There are broadly two types:
- Provides a guaranteed income for life
- Provides a guaranteed income for an agreed period usually with a guaranteed lump sum at the end of the period.
Fixed term annuities are becoming increasingly popular. They help the client “plug a gap” between years for example from them leaving work to receiving their State Pension. The amount received per year can also be agreed.
Up to 70% of the workforce have already left the workplace prior to the State Pension age. Labour-market-effects-of-the-increase-in-the-state-pension-age.pdf (ifs.org.uk) (60% of men and 70% of women)
The retiree has a range of options to get the best possible product for them.
These options can be:
- length of term usually from 5 to 10 years
- beneficiaries can choose a period where the annuity continues to be paid to their loved ones.
- how much, if anything, does the annuity increase by every year. This could match inflation or be a fixed amount like 3%.
Current Rates for Lifetime Annuity
Recent rates, as of 15 September 2023 show that a 65-year-old with no escalation and a 5-year guarantee who has £100,000 buys £7,317 per annum.
The same amount, with a 3% per annum escalation, buys £5,714.76 per year.
https://www.hl.co.uk/retirement/annuities/best-buy-rates
Current Rates for Fixed Term Annuity
Our 65-year-old with £100,000 can have a ten-year Fixed Term Annuity (with a guaranteed for the full period) that pays them £5,000 per annum. (so that’s £50,000 total income)
At the end of their term, they receive £100,103, so they receive their full amount back as well as benefiting from ten years of guaranteed income!
Their younger spouse also has £100,000 in a pension. They see that they have exactly 7 years till they can draw their State Pension. They want to step away from full time work and know they will be able to live on an extra £500 per month (£6,000 per annum) until they receive their State Pension.
They can receive this amount with a guarantee for the full 7 years. At the end of the term, they are guaranteed to receive £90,701. This means they have received a total of £132,701 from their initial £100,000 investment. The guaranteed maturity sum can now be used for another annuity, invested or taken as cash.
Quotes from The Exchange on 22/09/2023
Other stuff to know about annuities
Health matters – Pricing works in the opposite way to protection products – annuities can actually offer better prices if the client has health issues. Nearly a third of consumers think you need to be healthy to get an annuity!
Part of a plan, not the whole plan – annuities were often seen as a one and done.
While they still can be, we believe that they should be considered as part of a retirement plan. Clients can use some of their pension funds to purchase an annuity and keep the rest of their funds to invest. This means they can be safe in the knowledge that their bills are covered forever, and they retain the flexibility to treat themselves or their families.
