Annuity rates hit 13-year high

Even with the recent increases in annuity rates, the decision as to whether or not to purchase an annuity remains an extremely personal one. Some people suggest that you might want to purchase an annuity in order to have a secure income to cover life's essentials. However, most people have this to some extent already in the form of their inflation-proofed State Pension. Whether you need a greater level of secure income will largely depend on what your level of expenditure is, what other assets you have and also what sort of legacy you want to leave for your beneficiaries. As ever, personal finance is more about the personal than it is the finance.

Annuities fell out of favour in the past decade or so due to low interest rates and the introduction of pension freedoms in 2015. With interest rates having increased recently, annuities are becoming an increasingly attractive option for people who take regular income from their drawdown pension. Annuities provide a guaranteed income for life, which removes the uncertainty of whether a drawdown pension will last throughout retirement. However, annuities lack the flexibility of drawdown. Using a mixture of drawdown income and annuities could be the best option for the majority of retirees. The annuity could cover essential expenditure, such as household bills, while drawdown could be used to cover discretionary expenditure, such as eating out at restaurants or going on holiday. With additional interest rate rises by the Bank of England likely, annuity rates could increase further and so the dilemma for people considering an annuity now is that rates could be higher in just a few months’ time. A way around this dilemma could be to buy annuities in stages, securing income to meet your expenditure requirements as you need it. This strategy enables you to benefit from better rates as you get older as well as potentially being eligible for an enhanced annuity, which offers higher income for people with serious health conditions.

Annuities should always be the starting point for retirement income options. Why? Because they guarantee an income for the rest of the policyholders' life. To this can be added a number of other benefits including things such as spouse pensions and income rising in line with inflation or another measure. Increased annuity rates are great for those approaching retirement as it means that their pension pot will now secure a higher income for life. The problem is that many clients move to "less risky" assets as they near retirement and these assets are very sensitive to interest rate increases. This means that for many the increased amount of income they can secure through an annuity has been more than written off by the loss in their pension fund. Undoubtably, we will see an increase in annuity purchases over the coming months but a significant driver of this will be people reassessing their attitude to risk and deciding that a guaranteed income is better than the flexibilities provided by drawing their pension pot.

Annuities play a vital role in retirement planning. Their decline in popularity was driven by a combination of low annuity rates and people's biases towards the flexibility offered by income drawdown. Post-pensions freedom in 2015, drawdown became a default option for many financial advisers. It was easy to sell the dream of a flexible retirement, while keeping clients' funds invested. This has undoubtedly led to poor outcomes for retirees. The FCA is now turning its attention from defined benefit pension transfers to retirement income advice. Uptake of annuities in recent years is central to the regulator's concerns. Most people will benefit from some kind of annuity within their retirement plans because they offer a known, stable income. The annuity is an option everyone should consider. With annuity rates on the rise, it becomes more important and more attractive to do so. If people approaching retirement (or those already there) are unsure of how to evaluate an annuity, they should seek independent financial advice.