Elderly Brits considering using their pension pots to purchase an “income for life” annuity have received a significant financial boost. The current uncertainty surrounding the UK’s finances and the impact of Rachel Reeves’ October budget has brought some good news for pensioners.
Industry experts suggest that the high interest rates the UK government is paying on its borrowed billions have also increased the annual income that retirees can secure through an annuity. Pension companies offer a lifetime annual income, typically for 20 years, based on individuals using part or all of their pension pot to buy an annuity.
The size of this annual income depends on how much these firms can earn by investing these lump sum pension pots, which are currently much higher than anticipated. Consequently, someone using £100,000 to buy an annuity has seen the annual income this can provide increase from £6,431 a year at the start of 2024 to £6,843 now.
Elderly Brits considering using their pension pots to purchase an “income for life” annuity have received a significant financial boost
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This equates to an additional £412 per year and an extra £8,241 over 20 years. For someone with £200,000 to buy an annuity, the annual income would rise from £12,862 to £13,686 – an extra £824 a year or £16,480 over 20 years.
Canada Life said: “Whilst it was generally assumed that annuity rates would fall dramatically in 2024, as interest rates and gilt yields were expected to drop, expectations were defied and it proved to be another highly fruitful year for annuity customers.
“The first full week of 2025 saw a dramatic spike in government borrowing costs, with the 15-year gilt yield standing at 5.179 percent compared 4.23 percent on the same date in January 2024. Furthermore, with financial markets reducing their expectations around the number and speed of interest rate cuts in 2025, it is looking increasingly likely that the return of annuities is not just a flash in the pan and is possibly here for the longer term.”
The company said annuity rates are largely linked to the return on government gilts – the return that is provided when effectively lending the government money.
Nick Flynn, Retirement Income Director, Canada Life, said: “Additional government spending, global uncertainty and higher taxes are all contributing to the recent increase in the cost of government borrowing. Whilst there are no cast iron guarantees, if this trend continues, then it’s a strong possibility that annuity rates will be maintained or even increase in 2025.”
He added: “Annuities offer individuals security and a guaranteed income for life. However, it’s important to seek the advice of an annuity specialist or regulated financial adviser who will be able to help you find the best annuity product for you, with potentially wider benefits for your spouse or loved ones included too. Either way, be sure to shop around for the best option as opposed to accepting your existing insurer’s offer as the decision to purchase an annuity is irreversible.”