Why have annuities made a comeback for UK retirees?

Annuities may have gone under the radar somewhat for much of the past decade or so, but all that has changed in recent months. A surge in sales has put annuities firmly back in the headlines, with thousands more retirees choosing an annuity for retirement income.

According to the Association of British Insurers 16,256 annuities were bought by UK consumers in the first three months of 2023. That’s 22% up on the same period last year.

The driver for the new interest in annuities is higher annuity rates. Higher rates mean more income for people who ‘annuitize’. That’s to say, those people who use their pension scheme savings to purchase an annuity.

An annuity lets anyone aged 55+ turn their private pension savings or some types of company pension into a regular income. An annuity provider agrees to pay guaranteed income unaffected by interest rate changes or market fluctuations, in return for the money the consumer has saved into their pension. Annuities can be taken for life or a fixed term.

UK annuity rates rose dramatically in 2022, so much so that Actuarial Post was reporting a 14-year high by October. In fact, they titled their review of annuity rate changes ‘Wow what a year for annuities’.

That’s pretty strong language from naturally conservative actuaries, so was their enthusiasm justified? In terms of both annuity sales and performance for consumers, the answer is a resounding ‘yes’.

An example quoted by the Actuarial Post was from Canada Life, one of the UK’s leading annuity providers. They reported an example of an annuity on a £100,000 initial purchase price for a 30-year guaranteed period. Their example would pay £59,940 additional income compared to rates at the beginning of 2022.

One might be hard-pressed to think of another way that someone with £100k in savings can generate almost £60k additional guaranteed income from those savings. It’s perhaps no surprise that increasing numbers of people are looking into the option of an annuity for all or some of their non-State retirement income.

Annuity rates tend to fluctuate daily, but rates have remain consistently high compared to pre-2022 levels. In June of this year for example, The Telegraph reported that: “A 65-year-old with £100,000 can currently buy an annuity paying £7,300 a year, the highest level since last year’s mini-Budget [of September 2022].”

The increase in the annuity rate has been fuelled by increases in gilt yields, which are linked to the Bank of England’s Base Rate. With no sign of the Base Rate falling, and the possibility of further rate rises in 2023, we could see annuity rates follow suit.

Indeed, according to This is Money, Mark Ormston of leading annuity broker Retirement Line says it is “not inconceivable that annuity rates will jump to 10 per cent if, as widely predicted, the Bank of England base rate rises to 5.5 per cent in the coming months”.