Annuity rates have increased significantly since the infamous “mini” Budget in October 2022, and now nearly a year later annuity providers are announcing record annuity sales.
Is this just a short-term phenomenon or the start of a renaissance for annuities?
As the income from annuities has increased by about 25 per cent over the past year and by more than 60 per cent since the 2020 nadir, it is not surprising that more and more people are purchasing annuities.
Most advisers will be aware that annuities are priced in relation to the yields on fixed interest investments, and the yield on 15-year gilts is a useful benchmark. During the Covid-19 pandemic in 2020, the yield fell to about 0.5 per cent. It is currently about 4.6 per cent.
Using the rule of thumb that for every 100 basis point rise in bond yields we can expect a 10 per cent increase in annuity income. This suggests that annuities should have increased by about 30 per cent over this time period as yields were up by about 300bp, but the benchmark annuity has increased by 60 per cent, which is double that amount.
It is no wonder that annuity sales have increased significantly, since someone looking to arrange a £100,000 annuity can now get about £2,500 a year before tax depending on age and options compared with the 2020 low point.
As the chart below shows, annuities were in decline from 2008 to 2020 before shooting up dramatically in 2022 and 2023.
When considering if this is a flash in the pan or a longer rate trend, there are several important questions.
Will annuity rates continuing to increase?
It is always difficult to predict markets, but with signs that inflation is getting under control yields may have plateaued, so no big swings are predicted. Therefore, it seems annuity rates will move up and down within a relatively narrow band in line with changes to yields.
The big unknown is the outcome of the war in Ukraine, which still has cause to spook financial markets.
Will the image of annuities improve?
I hope so. There has never been anything wrong with the concept of annuities, and they are still the only financial policy that can guarantee a high level of income for life no matter how long that is.
The problem has been low interest rates. Now they are at a reasonable level it is a good time to remind ourselves of the advantages of annuities, including the peace of mind and security that people will not outlive their annuity income.
Will advisers start to favour annuities over drawdown?
Up until recently, the default position for many people wanting to convert their pension pot into income is to take advantage of pension freedoms such as drawdown. But now annuity rates are higher, the investment returns required for a drawdown arrangement to pay the same income are also higher, so the case for annuities is much stronger.
Putting aside the attraction of leaving money to beneficiaries, those who want to maximise lifetime income with peace of mind and security, especially cautious investors, may find annuities hard to beat.
