Martin Lewis compares pension annuity against drawdown
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Pensioners are set to receive 35 percent more income from their retirement savings, as annuity rates are on the up. The retirement savings option has dropped in popularity in recent years, following sub-par rates.
Annuities offer a guaranteed form of income for life, which may be more favourable for those looking to avoid risk.
It therefore presents good news for pensioners rates have risen by 35 percent over the past year.
It means someone aged 65 with a £100,000 pension can now get annuity income of £6,637 per year, through a single life level five-year guarantee.
This is compared to last September when the same person would have only received around £4,900 per year.
Annuity rates are turning, and this marks the highest level in more than a decade.
The last time rates were this high was March 2010, when a 65-year-old man could get £6,678.
The decision made yesterday by the Bank of England to increase its Base Rate to 2.25 percent could spell further hikes for annuities.
It is yet to be seen how the matter will play out in the coming weeks, but experts suggest people should expect rises.
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Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “Annuities once ruled the roost in retirement income but the low rates on offer meant they faced criticism that they offered poor value for money.
“The introduction of Freedom and Choice, which gave people much more flexibility over how they took their pension, saw their use decline hugely.
“These rising rates could encourage people who wouldn’t have thought of purchasing an annuity this time last year to give them serious consideration.”
Millions of people are looking for a guaranteed income in retirement, which is particularly the case given the uncertainties surrounding the rising cost of living.
However, the state pension is increasingly being viewed as simply a safety net, with Britons actively encouraged to save for themselves.
Consequently, Ms Morrissey suggests annuities could be important for all retired people.
She continued: “Annuities should always form a part of any retirement income conversation.
“Once an annuity is bought it cannot be unwound and this can concern would-be annuitants who don’t want to lock into a rate that then subsequently rises.
“However, you are under no obligation to annuitise your pension in one go.
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“A good approach could be to annuitise in stages, securing income to meet your needs as you need it.”
Annuitising as a person goes along could provide two key benefits.
Firstly, it offers the chance to secure higher rates as a person ages.
Individuals may also qualify for an additional boost through an enhanced annuity if they develop a medical condition at a later point in life.
A second benefit is that it provides the opportunity for a person to keep the remainder of their pension invested for longer.
This offers individuals the chance to grow their pension wealth, potentially offering the opportunity to purchase a larger annuity later on.
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