Retirees aged over 60 can now secure an annual income of £7,060 through annuities, even before they qualify for the state pension. This follows a rise in annuity rates to 7.06% in July, up from 6.95% in April, marking the highest levels since August 2008.
How Annuities Work
Annuities are financial products that convert a private pension pot into a guaranteed annual income for life. According to life insurance firm LV, to purchase a pension annuity, you must be at least 55 years old and have at least £2,000 to invest after taking any tax-free cash.
For a 60-year-old with a £100,000 pension pot, the average annual payment is now £7,060, based on the July rate. Over the lifetime of the annuity, this could mean an additional £3,000 compared to earlier rates, increasing total income from £170,000 to £173,000.
Higher Rates for Older Ages
The rate increases with age. For those aged over 65, the annuity rate has risen to 7.75%, a boost of 1.17%. For over 70s, the rate has increased to 8.43%, up 0.60%.
Pete Cowell, Head of Annuities at Standard Life, noted: “Annuity rates have reached 7.75%, the highest rates since August 2008, underlining just how much the retirement income landscape has shifted in recent years.”
Impact on Payback Period
Cowell added: “At today’s rates, the time it takes to receive back your initial investment has significantly shortened. The payback period for a £100,000 annuity purchase with a rate of around 5% in 2020 would have taken around 20 years to repay. However, with today’s rates closer to 7.75%, that falls to around 13 years, depending on individual circumstances.”
Considerations and Downsides
LV warns that annuities have downsides. They are subject to income tax, and payments can affect state benefits. Additionally, annuities cannot be changed or surrendered once purchased, so it is a one-time decision.
LV advises: “The pension annuity cannot be cashed in or surrendered at any time. Purchasing a pension annuity is a once and for all decision. The options you select when you buy the annuity cannot be changed later on. Annuity payments are classed as income and are subject to income tax, and could affect any state benefits you claim – it is worth seeking advice from a financial professional to see what income tax you may be liable for.”
They also note that depending on how long you live, you may receive less than you paid for the annuity, and recommend outlining any medical conditions as this may result in a higher income.
