Pension Annuities Back in Demand 2022

Annuities, as a retirement income vehicle, are back in fashion given higher annuity rates than we have seen over the last decade or so.

What is an annuity?

It is a guaranteed income for life or a fixed term payable either at a flat rate or % yearly increases or linked to inflationary increases.

How is an annuity funded?

You or you company pension builds up a pension fund.  After you have taken any lump sums, the balance of your pension fund is then invested in ‘gilts’ to get a guaranteed income for the next 20 or 30 years.  This gives the annuity company a secure income to allow them to then offer you a secure annuity income.

What is a gilt?

When the government borrows money, it issues ‘gilt edged securities’ i.e., Gilts.  Government borrowing just like an interest only mortgage, they borrow money, they pay interest only for the next 20 or 30 years and then the Gilt matures, and then original capital borrowed is paid back.  The levels of interest paid by the government are known as gilt yields or coupons rather than interest rates.

Gilts yields are linked to Bank of England interest rates and a demand/appetite for investors to lend money to the government. 

• In low interest rate times, gilts ‘interest’ yields will be low, and the knock-on effect is that annuity rates are low. 
• In higher interest times, gilts ‘interest’ yields will be higher, and the knock-on effect is that annuity rates are higher.
• In addition, in times of economic difficulty or a lack of confidence in a government to manage the economy, lenders (investors) may want a higher rate of return (gilt yield) before lending money to the government.  The government pays more to borrow money.

Today, we have a combination of higher interest rates, that are expected to go much higher, and a lack of confidence in Chancellor, Kwasi Kwarteng’s budget plans to get the UK out of recession and into growth.  Therefore, gilt yields (cost of government borrowing) are much higher, the costs to buy a gilt are lower, thus pushing annuity rates higher than they have been for many years.

Annuities for Retirement Planning

As a minimum standard for retirement planning, you look for your subsistence living expenses to be covered by guaranteed pension income such as state pensions and annuities and the balance can then either buy more annuities if you are low risk or use flexible drawdown if you prefer to have some risk and potential for investment growth and outpacing inflation where possible.

Remember annuities are usually guaranteed for life but they may stop if you die prematurely without either a spouses annuity built in or a 5 year, 10 year or longer guaranteed payment period.

Our Fees for Annuity Advice: Annuity

Contact  Call Back  Calculators  Our Fees