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Higher rates are boosting returns from these income-for-life products

Before former Chancellor George Osborne stood at the House of Commons despatch box on 21 March 2014, most people who retired were shovelled into an annuity contract with their existing insurance company.

In many cases these products represented poor value for money, either because the rate on offer was paltry or wasn’t tailored to their circumstances.

Following Osborne’s announcement of the pension freedoms – which were introduced a year later in April 2015 – the tables dramatically turned.

Nowadays roughly twice as many people opt for the flexibility and choice of drawdown rather than securing a guaranteed income for life by purchasing an annuity.

But with rates slowly ticking up, is now the time for retirement income investors to revisit the case for annuities?


The pension freedoms were a final kick in the teeth for annuities after a torrid few years during which the rates offered by insurers nosedived. In fairness, this was mainly due to economic circumstances that were out of their control.

Annuity rates are essentially pegged to the yield on offer from long-term Government gilts, with insurance companies buying these gilts to match the guarantees they have made.

The massive £435bn quantitative easing programme launched in the wake of the Financial Crisis drove gilt yields into the dirt, and this in turn hung like an anvil round the neck of the annuity market.

To give you an idea of just how far rates fell, prior to the 2007/08 crash a healthy 65 year old with a £100,000 fund would have been able to buy a level, single-life annuity worth just shy of £8,000 a year. By September 2016 this had fallen to £4,696.

Since that low, rates have picked up by somewhere in the region of 15-20% - and could rise still further once QE is unwound.


Whether or not an annuity is right for you will depend on your retirement goals, personal circumstances and risk preferences.

Certainly if you don’t want to take any retirement risk at all it’s worth seriously considering buying an annuity. For many a combination between the security of an annuity – perhaps to cover essential spending – and the flexibility of drawdown will provide the right retirement mix.

But if you do decide to plump to convert some or all of your pension pot into an annuity, it is critical you shop around the market to get the best possible deal.

In particular, make sure you go for a medically underwritten or ‘enhanced’ annuity if you have a life limiting illness such as diabetes or cancer. You could also get a significant rate boost based on your lifestyle, for example if you have smoked for long periods of your life.

Tom Selby, senior analyst, AJ Bell

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