Pensioners get inflation-busting £1,100 pay rise as annuity rates rocket – 'they're back'

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Four successive interest rate hikes from the Bank of England have electrified the annuity market. Somebody buying an annuity at age 65 today will get up to £1,100 a year more income as a result.

The BoE has increased base rates from a record low of 0.1 percent in December to one percent from Thursday.

That is transforming the annuity market and income rates have rocketed in anticipation of further base rate hikes to come.

Annuity rates collapsed after the financial crisis in 2009, so that a 65-year-old man with £100,000 worth of pension could buy a level income of as little as £4,500 a year. Demand collapsed as a result.

Barely 60,000 people a year buy an annuity, with most preferring to leave their retirement savings invested in the stock market via drawdown, and taking income or lump sums as required.

Now pension experts say that is starting to change, as demand for annuities recovers along with rates.

Today, a 65-year-old non-smoker with £100,000 can typically purchase a level single life annuity income of £5,584 a year, according to latest figures from Hargreaves Lansdown. That’s around £1,084 more than last year’s £4,500 low, a rise of 25 percent.

If they smoked, they could get an even higher income worth up to £6,405 a year. That’s because their life expectancy is lower, which means the annuity company is unlikely to have to pay that income for as long.

Annuity provider Canada Life says its rates have climbed a staggering 36 percent since the beginning of last year. That’s more than FIVE times the current inflation rate of seven percent.

Canada Life’s annuity sales director Nick Flynn said the rate increases have been “dramatic”, especially in the last few months.

They may increase again following Thursday’s BoE rate hike, but he cautioned: “The market fully expected that interest rate hike, and the increase is already factored into today’s rates.”

READ MORE: Drawdown vs. annuity – how to determine what’s best for your pension

Flynn said annuity rates are rising at a faster pace because of intense competition between the five remaining providers on the market – Aviva, Canada Life, L&G, Just Group and Scottish Widows. “It’s ultra-competitive, with everybody competing to offer the best rate.”

Another difference is that most people only buy an annuity once. Thereafter, they are locked in for life.

“When someone decides to buy an annuity they are generally only interested in the top rate, and are free to shop around under what is called the ‘open market option’. 

“If any of the five annuity providers are not competitive they will receive no business, it is that simple. So as soon as annuity providers can increase their rates, they do so.”

Flynn said the biggest mistake anybody can make us to simply buy the annuity offered them by their own pension company. “You must compare every rate out there, either by doing it yourself directly, or via an annuity broker or independent financial adviser. That way you can be sure of getting the best deal.”

Unfortunately, any pensioner who has already bought an annuity will not benefit from recent rate increases, as they are locked into their current deal for life.

Choosing between an annuity and drawdown is a big decision, so consider taking independent financial advice, or talk to the free Pension Wise guidance service.


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