A guaranteed income for life attracts more interest

Post by Mearns & Company in News

Rising interest rates are changing retirement income perspectives

Three years ago was another era when it comes to interest rates. The Bank of England’s bank rate was just 0.1% in December 2020, a fraction of the current 5.25%. In December 2020 you could have bought a government bond maturing in 2035 giving you a gilt-edged annual return of less than 0.4%. Today’s 15-year gilt, maturing in 2038, offers around 5%.

Annuities boost

While the change in bank rate has had wide-ranging effects for many and received plenty of media coverage, the move in long-term government bond yields has attracted much less attention. Higher bond yields have pushed up the amount the government pays on its £2,600 billion debt pile, but another effect is that annuity rates have risen significantly across the board.

For example, in December 2020, a typical non-smoking 65-year-old (man or woman) could have secured a 4.8% guaranteed income for life by purchasing an annuity. Wind forward to October 2023 and for the equivalent 65-year-old buying an annuity today the rate is around 7.5% – an increase of over a half. The jump in annuity rates has prompted a surge in annuity sales, with the Association of British Insurers reporting a year-on-year increase of over a third in the first half of 2023. Some buyers may be turning away from the uncertainties of income drawdown after a disappointing 2022 in most investment markets.

Early withdrawal risk

Drawdown has become the main way to take a retirement income since pension flexibility was introduced, but it does involve investment risk, as last year underlined. Some retirees learned the hard way in 2022 of dangers inherent in drawdown known as ‘sequencing risk’. When values fall sharply in the early year(s) of regular withdrawals, they leave a rapidly depleted fund that will probably not sustain the same level of withdrawals for the remainder of the investor’s life.

Choosing the right option

If you are about to start taking an income from your pension fund or considering a move away from income withdrawals, look carefully at what today’s annuity market can offer you. Annuity tables are at best only a very broad guide for a variety of reasons:

• Annuity rates are now close to being individually calculated. Where you live, whether you smoke, how much you drink, any medical conditions you have, and your relationship status are all factors that can determine your personal annuity rate.
• Annuities may be set up as level or increasing, either at a pre-determined rate or in line with inflation. For that typical 65-year-old, full RPI inflation protection cuts the rate to about 4.9%.
• Joint life annuities are an option, meaning that a guaranteed income is paid for both your and your partner’s lifetimes.

To learn more about all your annuity choices and the latest rates, get in touch.

The value of your investment and the income from it 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.

Investing in shares should be regarded as a long-term investment and should fit with your overall attitude to risk and financial circumstances.

Occupational pension schemes are regulated by The Pensions Regulator.