Financial turmoil brings pension annuities back into play

Financial turmoil brings pension annuities back into play

 · 4 min read
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The financial turmoil brought about by the government's shambolic September mini-budget left many worrying about the viability of their pensions, but market conditions have seen annuities become attractive once again.

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While the sacking of Kwasi Kwarteng as Chancellor of the Exchequer caught many by surprise, it brought about an unexpected financial consequence. When Liz Truss began her press conference to confirm Kwasi Kwarteng was no longer Chancellor of the Exchequer, financial markets went into overdrive. Putting aside the apparent political turmoil, calls for a general election, and constant rumours Truss's days are numbered, this has brought pension annuities back into play.

Annuity rates are up 44% in a year

Companies such as Standard Life have seen a massive increase in demand for annuities in recent months. In just a year, annuity rates have increased by 44% and are now at their highest since 2009. An annuity is a financial arrangement which converts an individual's pension savings into an income for life. There are various types of annuities, but the stability they provide is starting to catch the attention of those approaching and already in retirement.

Why are annuity rates so strong?

Annuity rates are linked to long-term interest rates, such as 30-year gilts, where prices are falling, and yields have increased dramatically in recent weeks. Previously, with the introduction of "pension freedoms" by the UK government in 2015, many wrote off annuities as, at the time, they offered low relative value for money. Annuity rates were also under pressure because of low-interest rates over the last decade and increased life expectancy.

The yield on long-dated gilts is now approaching the 5% level, which previously prompted the Bank of England to intervene. While the Bank of England may yet intervene again, with base rates expected to hit 6% by the end of 2023, there will be significant upward pressure on rates for some time. Life expectancy is not as strong as it has been due to financial inequality, reduced access to healthcare and ongoing pressures on household incomes. Consequently, annuity rates have increased dramatically, as has demand.

What are the current annuity rates?

Figures this week show the stark reality between annuity rates in October 2021 against October 2022. As of today, someone aged 65 with a £100,000 pension pot would be able to secure a lifetime income of £7191 per year compared to just £4989 in October 2021. Income on this type of annuity has increased by £200 a year in the last seven days. This considerable increase has not gone unnoticed by advisers and those approaching retirement.

Common misconceptions about annuities

There are many misconceptions about annuities. Therefore it is essential to take financial advice at the earliest opportunity. For example, many people automatically assume that you need to invest your entire pension pot into an annuity. This is wrong. You can invest as much or as little in an annuity as you wish. Some people may look to lock in rates today, leaving funds for the future to take advantage of an expected further increase in rates. Alternatively, many of those approaching retirement use annuities to secure their annual living expenses, leaving additional pension funds for discretionary spending.

Shop around for the best annuity rates

There are many types of annuities, such as single life, joint life, enhanced or impaired and annuity incomes which increase in line with inflation. While the annuity market has always been around, it is certainly finding a new lease of life in the current financial environment. Consequently, shopping around for the best annuity for your situation is essential, as rates can vary significantly. This is where the advice and guidance of a financial advisor can be priceless because once you are locked into these rates, that is a lifetime/fixed-term commitment.

Outlook for UK interest rates

In just a couple of weeks, the consensus forecast for UK base rates in 2023 has increased from 3% to 6%. November's Bank of England Monetary Policy Committee meeting is expected to confirm a rise of between 0.75% and 1%, with the same again in December. Consequently, by the end of 2022, UK base rates could be up to 4.25% and beyond if the financial situation worsens. This has significantly impacted annuity rates, with many expecting a further rise over the next 12 months.

Jeremy Hunt takes over as Chancellor of the Exchequer, seen by many as a steady hand and an experienced operator, with financial markets still very jittery. Over the next few days, we will see further consideration of U-turns on the increase in corporation tax and abolition of the 45p tax rate. In addition, there is talk of austerity, a delay in basic rate tax reductions and a potential increase in higher rate taxation. While it is often darkest before the dawn, there is no doubt that Truss and Hunt face many challenges.

Mark Benson
Mark Benson
Mark joined Age Group in 2020 and has over 10 years’ experience specialising in writing around property, finance, and investment subjects.
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