U.K. Annuities Are Popular Once Again

Many are ready for a steadier ride to retirement

Annuities are being discussed more nowadays as many people are feeling insecure about the stock market after the record-setting drop in 2022. Those watching their retirement savings shrink are looking for safer options for their financial future. 

As interest rates rise, annuity options are becoming much more attractive than they’ve been in years. According to Canada Life, the average benchmark rate is up 44% since January 2022, hitting a 14-year high in October 2022. 

Likewise, Legal & General (L&G) Retail’s analysis of its own 2022 data found its annuity rates increased by 40% in the 12 months to October 2022, and by 60% since 2016. 

Canada Life reported that its annuity quote volumes have increased by 58% and L&G found that nearly one million (990,000) pre-retirees are considering annuities for the first time. 

The L&G research found that 78% of those in their analysis were drawn to annuities because of the stability of a guaranteed income, which made it easier to plan their finances, with 36% stating they were drawn to the relative safety annuities provide in a volatile market. 

Number crunching 

The rate for a £100,000 purchase price for a healthy, single life – meaning the annuity pays the owner during their lifetime, and not to their spouse upon the owner’s death – with a ten-year guarantee, was almost 4% for a 60-year-old at the beginning of 2022. By the start of December, it had reached 5.9%, according to Canada Life. 

Similarly, for a 65-year-old with the same profile it rose from 4.5% to 6.6% and for a 70-year-old it rose from 5.25% to 7.2%. 

Rising percentages are impressive but how do they translate into cash?  

Canada Life provides some examples: For a £100,000 purchase price for a healthy single life, a 30-year guarantee would provide a total guaranteed income of £176,910 at the end of November, compared to £117,420 at the beginning of the year. For 20 years the guaranteed portion has gone from £86,100 to £125,760 and for ten years it has risen from £44,790 to £65,080. 

Folding annuities into a portfolio strategy 

Often, investors assume the choice is between drawing down their saved pension pot or buying an annuity. Now, the best advice is to combine those two – and perhaps, other investments – to create the best plan for your needs and risk level. For example, an annuity using part of a pension pot could be earmarked to cover fixed future expenses, while the rest of the pot is left invested, with the opportunity to benefit from long-term growth. 

Aisa International Senior Investment Advisor Chris Lean says, “Given the certainty of income provided by an annuity and the uncertainty in the markets over the past two or three years, those who are more cautious about investments or those who need guarantees should consider annuities as part of their plans.” 

Forethought needed 

An annuity is an insurance product that promises to pay out income at a future date based on invested funds. If one purchases an annuity for a set price, the issuing company would invest the funds and hold them until they are supposed to be disbursed, generally based on the owner’s age.  

There are several types of annuities, and they can be combined in different ways. It’s best to get professional advice for your individual situation, as there is little or no ability to alter the plan, should you want to.  

Investments in annuities grow tax-free until they are withdrawn or taken as income, typically during retirement. Payments from an annuity are taxed at regular rates. 

Fixed vs. variable 

A fixed annuity guarantees payment of a set amount for the term of the agreement. It can’t go down (or up). A variable annuity fluctuates with the returns on the mutual funds it is invested in. Its value can go up (or down). 

Variable annuities have greater potential for earnings, since their interest rate rises and falls with their underlying investments, they can lose money. They are also riddled with fees, which can cut into profits. Fixed annuities typically earn at a lower, stable rate. 

Annuity options 

The different types of annuities, explained by AgeUK.org: 

Level Annuity: Pays you the same income each year. They have a higher starting income than an escalating annuity, but they can leave you vulnerable to inflation, which might make your annuity income worth less over time.  

Escalating Annuity: An escalating annuity will rise each year at a fixed rate. It may start lower than a level annuity, but the amount it pays you will increase at a fixed rate (e.g. 3%) each year. 

Inflation-linked Annuity: An inflation-linked annuity will rise each year in line with the retail price index. This protects your annuity against inflation, but it will start at a much lower rate. 

Impaired or Enhanced Annuity: These pay out a higher income if your health or lifestyle may shorten your lifespan, for example, if you have an existing health condition or you smoke or are overweight.  

Lifetime Annuity: These will pay you an income for the rest of your life, unlike a short-term or fixed-term annuity. 

Joint Life Annuity: These will pay an income to your spouse or partner after your death, but this is usually at a lower rate. 

Short-term or Fixed-term Annuity: You might choose a short-term annuity if you don’t want to commit your pension fund to a life annuity as you believe rates might get better in the future. 

Many experts believe that interest rates will increase further into 2023, making this a good time to talk to a professional advisor to see if an annuity makes sense for individual retirement plan. 

The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up-to-date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation. 



Susan Austin

Susan Austin is a freelance writer living in Prague, Czech Republic. Originally from the U.S., she has written and worked in many industries, including healthcare, transportation, travel and leisure, museums, education, and archaeology.

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