What's happening to annuities? – Annuity rates are on the increase.
Why are rates rising? – Bond yields have risen from about 0.5% to over 1%
How much have rates increased? – The income from a £ 100,000 annuity has increased by about £200 per annum which is about 4%
Annuities rates are linked to the yields on fixed interest investments such as gilts and corporate bonds. 10 years ago, the yield on 15-year gilts was over 4% and the £100,000 benchmark annuity paid an annual income of £ 5,800 before tax.
Yields and annuities fell to the lowest point in recent memory in August 2020 when the yield fell to 0.45% and the benchmark annuity fell to £ 3,842.
Last week, (27 Feb 2021) the gilt yield rose to 1.01% and the benchmark annuity increased by nearly 4% to £3,972 per annum. (There is time delay between a rise in yields and increase in annuity rates so annuity rates could increase further.
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Generally speaking, for every 100 basis points rise in gilt yields (e.g. from 1% to 2%) annuity rates increase by 10 %.
So, the 50 basis points increase from about 0.69% in February to 1.2% in March should translate into about another £200 per annum for every £100,000 used to purchase an annuity and this would take the benchmark annuity about £ 4,000 per annum. This is what has happened.
In fact, when the yield was last over 1% in January 2020 the benchmark annuity was £ 4,188 per annum.
According to Billy Burrows, Retirement Director at Better Retirement, the recent increase in bond yields should hopefully be a turning point as it allows annuity providers to increase their rates and this should give a psychological boost to the annuity market.
The increase in annuity rates may be small, by even a £200 per annum increase is worth several hundred pounds when spread across the life of the annuity.
Most people underestimate their life expectancy. For example, a 65-year old man can expect to live another 20 years to age 85 whereas a lady of the same age can expect to live to age 87 according to the Life expectancy calculator from Office for National Statistics.
Mr Burrows says, the two most popular questions from clients are; when will annuity rates go up and when is the best time to purchase an annuity.
The answer to the first question is that annuity rates should continue increasing as we move towards the end of lockdown and hopefully yields will continue to increase
The best time is when you need to secure guaranteed income – technically you can look for the time when funds value are high and annuity rates good value but that is difficult to predict.
Emotionally, ask your self when do you want more peace of mind and security with your retirment income.