Written by Liam Moore
Independent Financial Planner

However, the financial crash of 2007/8 saw annuity rates hit a downward trajectory as the Bank of England began dropping interest rates to some of the lowest seen on record. This sharp decline in annuity rates is due to the fact that they are indirectly linked to government interest rates; as interest rates rise, so do annuity rates and vice versa. This is mainly down to the fact that annuity providers tend to invest in government bonds.

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The final nail in the coffin for annuities was the arrival of flexible pension freedoms in 2015. For the first time in history, all members of defined contribution pension schemes could now take as much or as little of their pension whenever they wanted, once they had reached the official retirement age. The Association of British Insurers (ABI) data highlighted that annuity sales had declined by around 80% since pension freedoms were announced in 2014 and remained at that level until 2021. 

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Remarkably, however, the past year has seen annuity rates climb at an astronomical rate as the Bank of England sharply increased interest rates to curb high levels of inflation. Annuity rates are now at a level not seen since 2009 and could continue to climb even further should the Bank of England feel the need to keep raising interest rates amidst stubbornly high inflation. To highlight this rise, if you had purchased an annuity in June 2022 with a fund value of £100,000 (and aged 65) you could have expected to receive an annuity offer of approximately £5,750 per annum. On the other hand, if you had taken an annuity out at the start of June 2023 (using the same assumptions) you could have received an annuity of roughly £7,100 per annum. 

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Although Flexi-Access Drawdown will still remain the most popular method of taking pension benefits for the majority of people, for some people there is now a case for reconsidering annuities. With the high cost of living and highly volatile investment markets, those looking to take a regular fixed income from their pensions may now look to an annuity to fulfil that objective, safe in the knowledge that their income will be secure for their entire lifetime. And now may be good a time as any to take advantage of annuity rates whilst they remain attractive. The Bank of England are hopeful that inflation can be brought under control by the end of the year (although recent inflation figures have somewhat dampened this optimism) which means that interest rates could then begin to be lowered. This means attractive annuity rates may only be here to stay for the short term, so those strongly considering a guaranteed lifetime income from their pension should perhaps consider acting sooner rather than later. 

However, like with anything in life, none of us can safely predict what will happen in the near future. If high inflation refuses to go away or another geopolitical event (such as Ukraine) happens then we may not see interest rates come back down anytime soon. This, in turn, could see annuity rates remain as they are or increase further in the months and years to come. 

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Using some or all of your pension savings to purchase an annuity is a big decision that should never be rushed into. If you are wanting some advice on whether an annuity would be an appropriate option for you, one of our advisers will be more than happy to help.