Your pension pot may have become more valuable recently โ but not because its investment value has surged overnight. Instead, it may now buy you a higher retirement income, thanks to changes in annuity rates.
Itโs all to do with the bond markets, interest rates โ and even Donald Trump.
What is an annuity?
An annuity is a way to turn your pension savings into a guaranteed income for life. You hand over your pension pot to an insurance company, and they provide you with a regular income in return โ fixed or inflation-linked, depending on your choice.
Once arranged, itโs set for life and unaffected by market fluctuations. However, the rate youโre offered depends heavily on economic conditions at the time you buy.
Right now, those conditions are unusually favourable.
Whatโs changed?
Annuity rates are closely tied to government bond yields โ where insurers typically invest your money to generate returns. When bond yields are low, annuity income is low. When yields rise, so do annuity rates.
Bond yields have risen sharply in recent years, due to two key factors:
- Higher interest rates from the Bank of England, introduced to curb inflation.
- Global trade tensions, notably from President Trump's tariff policies, which increased uncertainty and pushed up borrowing costs for governments.
As bond yields have climbed, annuity rates have followed. This means your pension pot might now buy you more income than it would have just a few years ago.
How much more could you get?
Back in August 2016, annuity income hit historic lows. A 65-year-old with a ยฃ100,000 pension pot could expect an annual income of justย ยฃ4,696.
Today, the same pot could secureย ย ยฃ7,895 a year โ a 68%ย ย increase.
Is it time to consider an annuity?
In an uncertain world, the combination of a guaranteed income for life and improved rates has made annuities more appealing again. In fact, in 2024, sales of pension annuity increased by a further 24% to 89,600, reaching a new ten-year high. According to the latest ABI data, total annuities sales reached ยฃ7 billion, a 34% increase on 2023.
Source - Another post-pension freedoms record for annuity sales | ABI
However, how long these attractive rates will last is unknown. The Bank of England has signalled a shift towards lowering interest rates to support the economy. This could gradually push annuity rates down again.
That said, there may still be a window of opportunity to lock in a higher income now โ or at least start planning.
Is an annuityย appropriate for you?
Buying an annuity is a permanent decision. Itโs important to:
- Shop around for the most competitiveย ย rate
- Choose theย ย suitable type: fixed, inflation-linked, joint-life, or single-life
- Consider combining it with drawdown or delaying purchase to getย ย the most appropriate rates with age
Alternatively, income drawdown allows you to keep your pension invested and withdraw income as needed โ offering flexibility, but also risk.
Some retirees use a mix of both: an annuity for guaranteed income, and drawdown for flexibility and growth.
Get expert advice
Deciding whether to buy an annuity, when to do it, and which type to choose requires careful thought. The stakes are high โ and the options complex.
At Continuum, we offer expert, independent advice tailored to your retirement goals. Weโll help you make the most of your pension savings and help you secure the income you need.
If retirement is on the horizon, speak to us today.
Annuity Rates Chart | latest changes to pension income
https://www.sharingpensions.co.uk/annuity_rates.htm
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits areย taken. Pension savings are at risk of being eroded by inflation
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
Past performance is not a guide to future performance.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.
You should seek advice to understand your options at retirement.
