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

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Rocketing annuity rates are a rare piece of good news for pensioners desperate to generate reliable income in retirement. Rates are already rising and there is more to come, giving pensioner incomes a massive boost.

On Thursday, the Bank of England’s monetary policy committee increased base rates from 0.25 percent to 0.5 percent.

This followed December’s base rate hike, and experts predict interest rates will climb higher as the BoE battles raging inflation.

Base rates are set to hit 1.25 percent by the end of 2022, and 1.5 percent in a year’s time, said Laura Suter, head of personal finance at AJ Bell. “The BoE is not going to stop now.”

This has had little impact on cash deposits so far, as banks refuse to pass on higher rates to savers.

However, annuity rates have already jumped more than five percent and that is only the start, said Andrew Tully, technical director at Canada Life. “After years in the doldrums, annuity rates are set to revive at last.”

Pensioners who buy an annuity over the next year could be get a huge income boost as a result.

An annuity is a guaranteed income for life that retirees can buy with their pension pots when they reach retirement.

Demand collapsed after the financial crisis when interest rates plunged almost to zero, savaging returns on annuities.

Most pensioners now leave their money invested via income drawdown, and take income or cash lump sums as required.

However, drawdown can be highly risky as pension pots could plummet if stock markets crash, reducing the amount of income savers can draw.

Fears of a global stock market crash are growing, after investment veteran Jeremy Grantham warned we are in the middle of a global stock market “superbubble”.

Annuities offer much greater security because the income they pay is guaranteed to last for life, regardless of what happens to share prices.

Now they are starting to paying higher income, too.

READ MORE: DOUBLE your State Pension – beat triple lock and add £10,000 income

Annuity rates climbed by a thumping 5.4 percent in January alone, largely as a result of the BoE’s base rate hike in December, figures from Canada Life show.

They are set to rise again following Thursday’s interest rate hike, Tully said. “Millions of retirees have forgotten all about annuities, but now may be a good time to remember just how useful they can be.”

After January’s increase, a 65-year-old man with £100,000 of pension can now buy “level” annuity income of £4,781 a year.

That is up from around £4,531 at the start of the year, providing a £250 pay rise. That is only the start.

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If the Bank of England lifts base rates to 1.5 percent as expected, that would add more than 14 percent to today’s annuity rates, Tully said.

So in a year’s time, the same £100,000 pension pot would buy income of £5,450 a year. That is a massive £669 a year more than today and nearly a 20% improvement on the rates available just weeks ago.  

Victoria Scholar, head of investment at Interactive Investor, said this extra income would be particularly welcome after the Government scrapped the triple lock, boosting the State Pension by just 3.1 percent a year while inflation rockets towards 7.25 percent.

Unfortunately, pensioners who have already locked into an annuity will not benefit. Once you buy an annuity, you cannot exchange it, frustrating millions.

However, the next generation of retirees will reap the rewards of higher annuity rates.

Tully said that using, say, half your pension to buy an annuity and leaving the other half invested in drawdown could give you the best of both worlds.

Consider seeking independent financial advice.


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