Pensioners rush to buy annuities again as income jumps by £1,000 a year

Pensions expert offers tips to keep finances on track in 2022

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Annuity provider Canada Life has already hiked its annuity rates twice this year, with more increases to come. It reports a surge in demand as pensioners seek the security of a guaranteed lifetime income.

However, buying an annuity is not the right decision for everybody, so think carefully before taking the plunge.

Also, it may be better to wait delay your purchase because the Bank of England is expected to increase base lending rates four more times over the next year, which will drive annuity rates much higher.

Canada Life reports that a 65-year-old man with £100,000 pension pot would get £250 more income than just one month ago, after annuity rates rose 5.4 percent in January alone.

Now it predicts annuity rates will rise by another 14 percent over the next year, if the Bank of England hikes base rates to 1.5 percent as expected. That would deliver a further £700 annuity income.

The total increase in annuity income would be £950 over the course of just one year.

In that time, the income from a £100,000 pension pot would have jumped from £4,500 to £5,450 a year.

Canada Life’s annuity sales director Nick Flynn said it quickly responded to December’s Bank of England base rate rise by lifting annuity rates twice in January. “We are carefully monitoring yields and will increase our rates again, the moment we are able to pass on any improvement to our customers.”

He said demand has jumped this year and higher interest rates are not the only reason. “It may also be down to pent-up demand as people postpone retirement due to the pandemic.”

Most new retirees still leave their pension savings invested via drawdown, but may now consider buying an annuity with some of their pot. “Pensioners like the security of lifetime income, especially in times of uncertainty,” Flynn said.

Roger Clarke, partner and chartered financial planner at APFS, said pensioners have shunned annuities for years due to low interest rates and lack of flexibility. “For most people the answer was: ‘Why on earth would I buy an annuity at those rates?’.”

That is now changing. “The annuity corpse has been twitching as you can now get far more for your money,” Clarke said.

Buying an annuity is a complicated decision, though, and you need to make sure you are getting the best deal.

Do not simply buy the plan offered by your own pension company, Flynn said: “It always pays to seek advice and shop around to secure both the best annuity rate, and the right one for your personal circumstances.”

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You also have to chose between a single life annuity that pays out for as long as you live, or a joint life annuity, which will continue to pay 50 percent income to a partner if you die before them.

Another question is whether to buy a level annuity, that pays a flat rate of income, or an “escalating”, index-linked annuity, where the income rises in line with inflation.

The level annuity will pay more income at first, but if inflation skyrockets its spending power will be quickly eroded.

Income on index-linked annuities is lower at first, but will steadily rise over time.

Do not rush your decision and take independent financial advice if required. Annuity rates should steadily rise from here, so take your time and you may grab even more income later.

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