Brits eyeing to utilise their pension pots for an “income for life” annuity are in for a significant financial lift. The gloom cast by the UK’s economic woes and Rachel Reeves’ October budget has surprisingly benefited some retirees.
Experts in the industry note that the high interest rates that the UK government is paying on its borrowing have subsequently boosted the payout potential of annuities.
Pension firms provide a guaranteed yearly income for typically 20 years when individuals purchase an annuity with all or a portion of their pension savings. This yearly amount depends largely on how much the pension providers can earn by investing these lump sums, which are now yielding much higher returns than initially anticipated.
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Hence, a retiree looking to buy an annity with £100,000 would now see the annual income figure jump from £6,431 at the start of 2024 to a current rate of £6,843. That’s a pleasant increase of £412 per annum or an added £8,241 over two decades.
Similarly, for someone with £200,000 for annuity purposes, this means an incremental annual income rise from £12,862 to £13,686 – boosting their yearly income by £824 or a hefty £16,480 over the course of 20 years, reports the Express.
Canada Life commented on the development stating: “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 to 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 explained that annuity rates are closely tied to the performance of government gilts, which reflect the returns from lending money to the government. Nick Flynn, Retirement Income Director at Canada Life, commented: “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 further advised: “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.”