Annuities….”Problem is, the rates are pants” ….well not anymore

Annuity rates are at a decade high. Great news for those who want to add some lifetime guaranteed income!

A guaranteed lifetime income sometimes referred to as an annuity by many, can be considered a great investment for retirement in terms of what it provides.

It pays you a known income no matter what happens to the stock markets, what happens to interest rates and no matter how long you live.

Another huge benefit is that you don’t have to think about it after you’ve bought it. You just get paid each month for life.

However, as Martin Lewis once said, with good reason at the time…. “Problem is, the rates are pants”

Well that’s not the case anymore. The cost of buying guaranteed lifetime income is pretty much the best it has been for over a decade.

So what may you want to consider?

The Pension Freedoms have been popular. Many people love the flexibility of taking money from their pension pots as and when they choose.

An annuity is very different. It is by design a fixed guaranteed income with no flexibility. We would not suggest anyone who wants flexibility to use of all their pots to buy one. But, you don’t have to, unless you want to, as no one is forcing you to do this anymore, like they did 10 years ago!

Many people can benefit from using a proportion of their pots to buy one. This will give them a level of guaranteed income (along with the State Pension) with the rest used to provide flexible income as and when needed. Some may say its the best of both worlds!

What do the best rates in a decade look like?

Based on illustrative rates from a large insurer, as at 1 February 2023 (please note these will change every couple of weeks as market conditions change) a person aged 65 can convert £100,000 into £6,900 per year, guaranteed for life.

OK, so what would I get back for my £100,000 in total payments if I live to….?

  • 80 – £103,500
  • 85 – £138,000
  • 90 – £172,500
  • 95 – £207,000
  • that’s not too shabby. But it gets better…..

These are illustrative rates based on the insurer knowing nothing about your health. In simple terms, if an insurer knows nothing at all, they will assume you are perfectly fit and healthy. You may be just that, but most 65 year old’s aren’t, so if you’re willing to share information on your health, lifestyle and smoking status you can find these rates could get even better.

For someone just classed as in average health, this could increase to £7,200 a year. Whilst someone in average health who smokes could see this increase it to £8,000.

The same total lifetime payments for the £100,0000 would then be…..

Average health non smoker

  • 80 – £108,000
  • 85 – £144,000
  • 90 – £180,000
  • 95 – £216,000

Average health smoker

  • 80 – £120,000
  • 85 – £160,000
  • 90 – £200,000
  • 95 – £240,000

A £100,000 purchase has been used to make the numbers simple. The income provided will vary based on a number of individual factors including the purchase price.

How can you use some of your pots to buy some guaranteed lifetime income?

You can look around the market to buy an annuity and use some of your pension pot to buy one. This will then be paid directly to you.

An alternative is to add some guaranteed lifetime income directly into your retirement pension pots, alongside the other investments. This income will be paid into your pension pot . You can either take it as income right then if you need it, as most people will, or, if it is not needed in any month, it can be left in the pension pot and potentially grow with investment returns until you do.

In Guiide we can model this second option for you. You can see if your plan will still be expected to work (with less risk). You can choose the percentage of your pot you would like to use to buy a guaranteed lifetime income in our Dashboard area.

Later this year, you will be able to make a purchase directly with us, if you are using our proposition.

But does adding guaranteed income reduce my overall expected growth?

Many simple default investment portfolios that providers offer for post retirement are typically around 40% growth assets (UK and International shares, property etc) and 60% matching assets (UK and International governments and large companies debt).

Purchasing some lifetime guaranteed income is also a matching asset. So if you purchase some using 20% of your pots. You have 80% left to invest in a portfolio.

You could split this 80% into 50% growth 50% matching. That way you have 40% in each.

With the added 20% in a lifetime guaranteed income alongside this, you still have 40% growth and 60% matching, which is just the same as before.

Your overall expected level of growth has not changed, the only difference is a significant part of your matching assets now provide a set income guaranteed for life, rather than just being invested in government and company debt.

Fancy adding some Guaranteed income into your plan. You can add 25% simply at retirement in our main journey based on the latest known high illustrative rates.

You can then also model different percentages in our Dashboard section if registered. We only add features our users find useful, so please don’t forget to toggle the switch there to say you are interested. That way we can keep you informed as we launch this later this year.

What if I am happy to use all my pots to buy one?

If you do want to use all your pots to buy a completely guaranteed income and are happy with no flexibility, you can already do this using our whole of market annuity broker. Again you can find them in the guaranteed income section of our Dashboard area. They can help get you the best deal on current rates, based on your circumstances.