Pensioners to get 20% real terms pay rise GUARANTEED for life – ‘waited years for this'

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Pensions and savings: Interactive Investor expert gives her advice

The income paid by annuities is set to rise 20 percent in 2022, as the Bank of England repeatedly hikes interest rates. It’s a rare piece of good financial news for pensioners, with the triple lock scrapped and the big banks paying a meagre 0.01 percent on cash.

Consumer price inflation climbed by 5.5 percent in the year to January, today’s figures show, yet the returns on annuities are set to rise at an even faster rate, giving pensioners who buy them a real-terms pay rise.

The amount of income annuity is paid depends on two factors – interest rates and government bond yields.

Both are now rising, as the BoE hikes interest rates to curb inflation. As a result, annuity rates jumped 5.4 percent in January alone, following the December base rate increase to 0.25 percent, and are set to jump again after base rates hit 0.5 percent on February 3.

Base rates rates are expected to hit at least 1.5 percent over the next year, which should boost annuity rates by another 14 percent, Canada Life calculates. That’s 20 percent more over the year.

Becky O’Connor, head of pensions and investments at Interactive Investor, says retirees have waited years for this moment.

Happy

Pension who get higher annuity income can get out and have some fun (Image: Getty)

Annuity rates collapsed after the financial crisis, when base rates were slashed to 0.5 percent in March 2009.

Sales then fell for more than a decade, dropping another 13 percent in the 2020/21 tax year, to just 60,383 in total.

Almost 10 times as many people chose to make flexible pension withdrawals via drawdown instead – 596,080 in total.

Yet O’Connor says demand may now recover as pensioners realise they can get much more income, as well as more security.

The big advantage of an annuity is that the income is guaranteed to continue for life, no matter how long you live, she says. “By contrast, money invested in drawdown is not guaranteed, and your pension pot could run dry if stock markets crash or you make too many early withdrawals.”

Annuity rates determine the amount of regular income you will get in return for your pension savings.

They are usually shown as how much money you’ll get a year for every £100,000 you pay in, Which? says.

READ MORE: State pension age ‘to soar past 70 as axe falls on triple lock’

Returns hit an all-time low of £4,696 a year in 2016, but today Just Group pays a 65-year-old man annuity income of £5,082 a year.

That’s a pay rise of eight percent – worth an extra £386 a year.

If annuity rates rose another 14 percent as anticipated, the same man would get income of £5,793 a year, up £1,097 from the 2016 low.

As a result, it may be worth waiting a few months before buying an annuity, rather than rushing to grab one today.

Providers such as Canada Life are keen to increase their annuity rates as interest rates rise, to give their customers more income.

With inflation climbing to 5.5% in the year to January, further increases cannot be far off.

On Monday, HSBC economist Elizabeth Martins predicted the Bank of England will be forced to raise rates in March, next month, and again in May and August, as inflation rockets.

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Higher

Higher annuity rates are finally something to celebrate (Image: Getty)

She said each increase will be 0.25 percent, or 25 basis points, lifting base rate to 1.25 per cent by the summer.

If she is right, annuity rates could rise at a breakneck pace.

Canada Life’s annuity sales director Nick Flynn urged retirees to keep an eye on rates. “Consider taking independent financial advice to decide whether buying an annuity or leaving your money invested in drawdown is better for you, as it’s a complicated decision.”

Pensioners must also choose between a level or inflation-linked annuity, or a single life or joint policy for couples.

Remember, annuities cannot be inherited by your family when you die, whereas pension funds held in drawdown can.

Once bought an annuity cannot be unwound. Unfortunately, millions of pensioners who have previously locked into an annuity will not benefit from rising rates.

Despite the annuity resurgence, drawdown may remain the better option for many.



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