After years on the retirement income sidelines annuities have taken centre stage in recent years as rising interest rates caused annuity incomes to soar.
An annuity converts your savings into an annual pension, giving you a guaranteed income for life, or for a specified period, according to Age UK.
Annuities reached a peak in the aftermath of the mini-budget back in 2022 with data from Hargreaves Lansdown’s annuity search engine showing a 65-year-old with a £100,000 pension would be able to get up to £7,586 per year from a single life level annuity with a five-year guarantee.
This is more than 50% higher than the £4,979 per year they could have got back in July 2021. As interest rates were held, incomes settled down — the same person can now get up to £7,217 per year.
However, after years of riding high, there are signs these rates may not be around for much longer, as rumours swirl that the Bank of England is looking to cut interest rates in the coming months. This would indicate annuity incomes will also start to fall back.
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But, it is fair to say that any cuts from the BoE will likely be gradual — annuities will continue to offer good value for some time yet.
It might be the spur for those who were undecided as to whether to get an annuity to finally take the plunge.
Here are some top tips for getting the most from an annuity:
Shop around
If you are in the market for a guaranteed income, then it’s vital to shop around — if you just accept the first quote then you may be missing out.
There are several types of annuities and several providers so it’s worth doing a comparison on an annuity search engine to make sure you are getting the best deal.
Consider your circumstances
When you are faced with a list of quotes, it’s tempting to just take the one offering the highest income.
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However, it’s a decision you or your loved ones may come to regret. For instance, single life annuities offer higher incomes than joint life ones but the joint life one will offer an income to your spouse should you die first. If you opt for the single life version, then your partner could be left with nothing if you die before them.
Give all your health details
You may feel hesitant about disclosing information about how much you weigh, or whether you smoke but when it comes to annuities, the more details you can give about your health and lifestyle the better as it can result in a higher rate of income that you benefit from for the rest of your life.
Consider the impact of inflation
You could be retired for twenty years or more and if you opt for a level annuity at outset then you might find its purchasing power nibbled away by inflation over time.
Inflation-linked annuities offer an income that grows over time and could be worth considering. However, you will have to accept a lower starting income.
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The latest data from the Hargreaves Lansdown annuity search engine shows a 65-year-old can get up to £5,177 per year from an annuity that grows 3% per year. This compares to the £7,217 someone with a level annuity can currently get. That income will grow but it could take you a decade for it to grow to match what you would have got at outset from a level annuity.
Don’t put all your eggs in one basket
You don’t have to use your entire pension to purchase an annuity on day one. Instead, you can purchase your guaranteed income in slices throughout retirement.
This enables you to secure income as your needs change while leaving the rest of your pension invested where it can grow.
You can benefit from higher incomes as you age and if you develop a condition that qualifies for an enhanced annuity then you could get an extra income boost.
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