FTAdviser claimed in December 2022 that “annuities are back”. Indeed, with annuity rates soaring, nearly 1 million people are said to be considering an annuity for the first time. But did annuities ever really go away, and what are the factors you need to consider before opting for one?
Keep reading to find out.
Soaring rates and the cost of living crisis have made annuities more attractive
In October 2022, annuity rates rose to a 14-year high. FTAdviser reports that average annuity rates increased by 52% in the nine months before the study.
The increase has lowered the break-even point (the point at which your annuity has provided you more in income than you originally saved) by seven years. You would now need to be retired for just 15 years to break even, down from 22 years.
The higher rates available mean that a £100,000 annuity at age 65 could now pay a guaranteed income of around £6,800 a year, compared to £4,500 at the start of 2022.
As well as rising rates, the cost of living crisis has also helped to make annuities more attractive.
At times of economic uncertainty, the known and stable income that an annuity offers can provide peace of mind.
The regular income – especially if you opt for it to rise each year to combat the effects of inflation – might be perfect for paying regular expenses like household bills and mortgage repayments.
Not only have annuity rates improved, but stock market volatility has decreased the attraction of flexible options like drawdown. These allow for ad hoc withdrawals, which can make budgeting harder. This option also leaves the remainder of your pot invested, which can be especially worrying during periods of short-term market volatility.
The cost of living crisis could make the annuity versus drawdown debate irrelevant
Money Marketing confirms that on top of the 1 million working people considering an annuity for the first time, an additional 828,000 pre-retirees always intended to take one.
Of those considering one for the first time:
- 78% want the stability of a guaranteed income
- 36% like the assurance it offers in a volatile market
- 16% are tempted by improved rates.
The report found that while 44% of pre-retirees stated they wanted a guaranteed income for life, only half of those had considered an annuity. This suggests further education is required.
An annuity is a great way to cover your fixed expenses, but you don’t need to be tied down to just one option.
While the cost of living crisis is currently making stable income more desirable, a combination of an annuity and a more flexible option could be right for you.
Flexible options like one-off lump sums, or flexi-access drawdown, offer great ways to access the large sums of cash you might need to cover one-off expenses like house renovations or luxuries like world travel.
But shopping around for your annuity could still see you £27,000 better off
Recent research from the Just Group has found that the gap between the best and worse annuity offers is widening.
For those looking for a “moderate” level of retirement income – as defined by the Pensions and Lifetime Savings Association (PLSA) – the gap could mean an extra cost of £27,000. That amounts to around a 14% difference in secure income for each pound of pension.
According to the PLSA, a moderate retirement income for a single person is said to be £23,000 a year, of which around £10,600 could come from the full State Pension.
An annuity providing an additional £12,700 a year (to make up the pension shortfall) could require a pension pot of anything between £194,000 and £221,700, a difference of more than £27,000.
As annuities begin to grow in popularity once more, understanding this widening gap is crucial. Shopping around for the best rate could make a huge difference throughout your retirement.
Get in touch
While annuities are currently looking more attractive than they have done in over a decade, it’s still important to shop around to ensure you get the right deal for you. The option you choose at retirement will have far-reaching consequences so making the right choice is vital.
Remember too, that you don’t need to pick just one option. A mixture of options might be the best way to secure your dream retirement.
At Hartsfield, we can help you to make the best at-retirement decision for you. If you would like to discuss any aspect of your long-term financial or retirement plans, please get in touch and find out how our team of expert planners can help.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.