Retirees weighing up how to turn their pension pot into a lifetime annuity income are being offered a better deal than they have seen in years. Today’s competitive rates mean a typical 65-year-old buying a £100,000 annuity get an average income of £7,373 a year, which means they recoup their original money after just 14 years.
In 2021, when interest rates were much lower than today, the same £100,000 annuity would have paid just £4,662 a year, and pensioners would have taken 21 years to recoup the initial investment. Nick Flynn, retirement income director at Canada Life, said annuity rates remain at their highest in more than a decade. “As a result, people are recouping their initial outlay significantly earlier.”
Official figures show that a 65-year-old woman is expected to live for another 21 years on average, and a 65-year-old man for 19 years. So they could receive several extra years of income after getting their money back.
Flynn said annuities offer attractive pricing and the certainty of a guaranteed income for life. He added: “This is increasingly valuable as people live longer and face extended retirements, giving financial stability and peace of mind.”
Health can also make a big difference. A standard annuity for someone aged 65 with no pre-existing health or lifestyle conditions would pay in the region of 7.4%. However, disclosing conditions such as diabetes, high blood pressure or smoking history can significantly increase what you receive, as your life expectancy is lower.
Flynn said we are in a buyer’s market and prospective retirees should shop around before purchasing an annuity to secure the best possible rate. Any purchase is irreversible once taken, so consider advice before committing.
For those worried about losing out if they die early, some annuities can be set up with guarantees to pay a minimum amount regardless of how long you live.
Most pensioners still prefer to leave their pot invested in drawdown, which offers flexibility but carries risk when markets fall. Combining the two might work well.