Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
THERE are few upsides to rapidly rising inflation and interest rates - but better payouts on annuities might be one of them.
Annuities - the products that take your pension savings and provide a guaranteed income in return - now pay around 20% more than they did a year ago, according to analysis by Standard Life.1 The increase since December 2021, before expectations for inflation and interest rates took off, is around 50%.
The table shows rates paid on different types of annuities to those of different ages. The prices on the left are for annuities which pay a flat amount with no guarantee (meaning income does not continue for a period after you die), while those on the right are for annuities which pay an amount increasing by 3% each year to combat inflation with no guarantee.
| Age | Level rate - no guarantee | 3% escalation - no guarantee | ||
|---|---|---|---|---|
| Annual income from £100,000 pension fund | Change since December 2021 | Annual income from £100,000 pension fund | Change since December 2021 | |
| 55 | £6,200 | 60% | £3,999 | 76% |
| 60 | £6,548 | 52% | £4,478 | 65% |
| 65 | £7,352 | 45% | £5,247 | 51% |
| 70 | £8,204 | 40% | £6,223 | 47% |
| 75 | £9,484 | 36% | £7,555 | 41% |
Source: Sharingpensons.co.uk
Interest rates in general have been rising, including for the assets that are used to underpin annuities. Annuity providers traditionally buy 15-year UK gilts to provide the income needed by annuity holders and yields on these have been rising. The chart below shows the change in 15-year gilt yields over the past 17 years.
You have to go back to 2008 to match the current 15-year gilt yield, following the recent remarkable run.
Gilt yields are closely correlated with changes in the UK Bank Rate. Expectations are for further rises by the Bank of England this year, potentially pushing 15-gilt rates even higher, before falling back. That means current prices could represent a peak.
Be aware that other economic and factors, such as the state of government finances, can influence gilt yields and also that exact annuity pricing is ultimately determined by annuity providers and may not always reflect these movements.
Is an annuity right for you?
Annuities were once the norm for people trying to secure a retirement income, but their popularity waned with the deterioration of rates.
Also, many retirees have preferred to access their pension money via drawdown or lump sums, which was made more popular after rules changes made in 2015. Doing so means income is not guaranteed and is affected by investment gains and losses, although you do keep ownership of your money and it remains available to pass on after your death.
The decision to use your pension money to buy an annuity or access it another way is not only dependent on the rates being paid on annuities. Your wider financial circumstances and need for guaranteed income is also important.
Thankfully, you’d don’t have to choose one or the other - you can mix your income options. For example, you may want to use annuities to cover your essential costs but be happy to leave the rest invested to access via drawdown. And, as the table above shows, annuities pay more at later ages so delaying the moment you buy could work in your favour.
A professional adviser can help draw up and plan for your retirement income that makes the most of your savings and helps to minimise the tax you pay. Fidelity’s retirement advisers use cash-flow modelling tool to show you the difference that mixing your sources of income can have.
Meanwhile, the government's Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.
Source:
1 https://library.standardlife.com/StandardLifeAnnuityRateTrackerJuly.pdf
Important information - Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. The minimum age you can normally access your pension savings is currently 55, and is due to rise to 57 on 6 April 2028, unless you have a lower protected pension age. This information is not a personal recommendation for any particular investment If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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