Following the recent rises in UK interest rates, annuity rates have been increasing.  But are they fair value right now and should you consider one as part of your financial plan?

Understanding UK Annuity Rates

Annuity rates represent the amount of income an individual can receive in exchange for their pension savings. These rates are determined by several factors, including interest rates, life expectancy, and economic conditions. In the UK, annuity rates have traditionally been influenced by the Government Bond (Gilt) yields. Higher yields often result in higher annuity rates.

How Do UK Annuities Work?

Purchase Phase:

You accumulate a pension fund during your working years, often through a workplace or personal pension scheme.

When you’re ready to retire, you can use some or all your pension savings to purchase an annuity.

Annuity Options:

You choose from various annuity options, each with different features. These include single-life, joint-life, level, escalating, guaranteed and more.

Income Payments:

Once you’ve selected your annuity, the insurance company calculates your income based on factors such as your age, health, and the annuity type.

You receive regular payments, typically monthly or annually, for as long as the annuity contract specifies.  If you have just chosen for your life, all payments stop on your death with no capital to your beneficiaries.

 Your decision at outset is fixed for life with these annuities.  Flexible annuities or temporary annuities are also available and while their rates have increased of late, I have excluded them from this blog.

What Rates Are Available?

Rates are highly individualised on you and so you can only use the below rates as a yardstick of where markets are right now.  I have shown below the best rate for an individual (the rate is the same for male and female), single, aged 60 with no underlying health concerns.  Higher rates are available if you have underlying health concerns that would decrease your life expectancy (hence shortening the time the annuity provider pays out for):

Summary

Annuity purchase is arguably the most important decision of your financial life.  Many have chosen to defer purchase until rates push higher and those individuals will surely be looking at the above rates wondering if they have peaked or can go higher.

If we see another UK Base Rate increase, annuity rates could go slightly higher but a 1:1 increase would seem very unlikely.

Do the above annuity rates entice previously annuity agnostic or sceptics into the market?  Possibly.  If you have a very cautious attitude to risk the above may be attractive, and while historically these are average annuity rates at best, they appear to be the best for nearly 15 years.

As always, please speak with your friendly financial advisor before you take action and …

Enjoy the journey.