Pensioners get inflation-busting 20% pay rise as annuities rocket – £22,000 extra cash

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That could add up to more than £20,000 over the course of a 20-year retirement and is a rare piece of good news as the cost of living soars. Annuity rates are set to rebound sharply as they are partly priced off interest rates, which are rebounding as the Bank of England hikes base rates to curb rampant inflation.

An annuity is the income you buy with your pension at retirement. It is guaranteed to continue for the rest of your life, no matter how long you live, offering huge financial security.

Annuities fell out of favour after the financial crisis, when returns crashed to all-time lows after the Bank of England slashed interest rates almost to zero.

By 2016, a healthy 65-year-old man with a £100,000 pension got rock bottom annuity income of just £4,696 a year, according to website Sharing Pensions.

Few pensioners were willing to lock into such low returns, but demand is picking up as interest rates rebound and annuity rates follow.

Today, annuity provider Just Group pays a 65-year-old man with £100,000 pension level income of £5,082 a year, according to Hargreaves Lansdown. That’s a pay rise of eight per cent on previous lows – worth an extra £386 a year.

Over the course of a 20-year retirement, the extra income would add up to £7,720 in total.

That’s only the start because annuity rates have much further to climb.

In December, the Bank of England increased base rates, from 0.1 percent to 0.25 percent. Annuity rates responded by jumping 5.4 percent in January, according to provider Canada Life.

The BoE hiked again on February 3 to 0.5 percent. That has yet to feed through to rates, but it soon will, said Becky O’Connor, head of pensions and savings at Interactive Investor.

She said: “The higher interest rates climb over the next year, the more annuities are likely to pay.”

READ MORE:Pensioners to get huge 20% pay rise as annuity rates soar at last

Markets expect the Bank of England to increase interest rates another four times by early 2023, which would lift base rates to 1.5 percent.

Canada Life calculates that this would add a further 14 percent to annuity rates, on top of January’s jump.

That makes a total pensioner pay rise of more than 20 percent. It would increase the income for a 65-year-old with £100,000 pension to £5,793 a year.

That’s £1,097 a year more than the 2016 low of just £4,696. Over 20 years, this would deliver £21,940 in total extra income.

An annuity is not right for everybody but the arguments in favour of buying one are getting stronger as rates recover, said Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown.

“The importance of a regular guaranteed income in retirement cannot be under-estimated and so annuities can play an important role in retirement planning.”

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Drawdown offers greater flexibility, but it also carries greater risk, as your pension could be depleted in a stock market crash.

Morrissey said there is another downside. “While some pensioners are keen to manage their investments via drawdown when they first retire, they find it harder as they get older.”

Many prefer the security of an annuity in later life. It means their income will continue even if stock markets crash, while pension funds held in drawdown may plunge in value.

Rather than buying an annuity right now, it may be worth waiting for rates to rise further, Morrissey said. “You don’t have to annuitise your entire pension all on one day, you can do so in slices over several years.”

A major drawback with annuities is that you cannot pass them on as an inheritance. “If you buy an annuity then die a year later then you haven’t got much value from it,” Morrissey said.

You also have to choose between a level annuity, that plays a flat income, or an inflation-linked policy. Couples must then decide whether to buy single or joint life annuities.

Once bought, an annuity cannot be unwound so understand what you are doing to minimise mistakes, Morrissey added. “Think it through and consider taking advice.


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