What the Rates Reveal and How to Secure the Right Option
When planning your retirement income, annuities deserve serious attention. A lifetime annuity transforms part or all of your pension savings into a guaranteed income stream, locking in certainty and protection against longevity risk. Below is an up-to-date assessment of current market rates and a clear overview of the purchase process.
Current Market and Rates
Annuity rates have surged in recent years, driven by higher gilt yields and sustained interest rate increases. This shift has positioned annuities as a compelling option for those seeking stable, long-term income.
- Reliable income: An annuity converts pension capital into a predictable payment stream for life or a fixed term.
- Attractive rates: A healthy 65-year-old investing £100,000 can currently expect an annual income of approximately £7,700–£7,900 (a 7.7–7.9% yield) on a single-life, level annuity.
- Individual factors count: Age, health, and lifestyle can enhance rates, while options such as inflation protection or survivor benefits reduce initial payouts.
- Timing is critical: Market shifts can alter rates rapidly, so reviewing options promptly and comparing providers can make a significant difference.
With rates near their highest in over a decade, now is an opportune moment to evaluate whether an annuity aligns with your retirement goals. However, as most annuities are permanent, careful analysis and professional advice remain essential.
How to Buy an Annuity
- Determine how much of your pension to allocate
From age 55, you can use a portion of your defined-contribution pension to purchase an annuity. Typically, up to 25% of your pension can be taken tax-free, with the remainder funding your guaranteed income.
- Select your annuity type and features
Decide between single-life or joint-life coverage, level or inflation-linked income, and fixed-term or lifetime payments. If you have medical or lifestyle factors, an enhanced annuity could significantly boost your income. Always compare multiple providers — rates vary widely.
- Request formal quotations
Obtain detailed quotes from several insurers, reviewing not just income levels but also guarantees, escalation rates, and death benefits before proceeding.
- Complete the purchase
Once selected, your pension funds are transferred to the provider, who begins paying your income. Most contracts are irreversible, underscoring the need for careful decision-making.
- Account for tax
Annuity payments are taxed as earned income. Income above your personal allowance (£12,570 for 2024/25) will be taxable, particularly once combined with your State Pension.
Unless you select guarantee periods or survivor benefits, payments will cease on your death.
Key considerations
- For investors seeking security and predictability, annuities remain one of the few instruments offering guaranteed lifetime income.
- Those valuing flexibility or legacy options may integrate annuities within a hybrid strategy alongside drawdown.
- With rates at multi-year highs, this is an ideal time to review your retirement income strategy.
- Professional financial advice is crucial to ensure structure, options, and tax implications are optimally aligned.
Annuities trade flexibility for certainty, but that certainty has tangible value. In an environment of elevated yields and financial uncertainty, securing a guaranteed income for life can form a cornerstone of a resilient retirement plan.
For a detailed, personalised analysis of annuity options and their role in your broader retirement strategy, please get in touch with your usual adviser or contact us on 0191 232 1151.
