Over the past 18 months, annuities have become hugely popular, largely driven by the significant improvement in the rates now available.
At the start of 2022, a benchmark1 annuity with a £100,000 purchase value would have paid an income in the region of £4,540 a year for someone aged 65 with no health or lifestyle conditions to declare. Roll the clock forward two years, that same annuity would pay around £7,000 a year, an increase of 54%, driven by rising interest rates and the returns available on gilts. Over the course of a 20-year retirement, the annuity at today’s rates would deliver around £49,200 extra income compared to an annuity sold in January 2022.
Annuity providers2 have announced strong sales, and Canada Life recently reported record individual annuity sales of £1.2bn for last year.
But where is the annuity market, and incomes, heading? Annuity rates are driven by the returns available on gilts, which in turn are linked to the Bank of England base rate. The Bank of England has held steady for the past seven months with a base rate of 5.25%, and financial markets are predicting a cautious approach to any changes in the near term.
Nick Flynn, retirement income director at Canada Life explores where the market may develop:
“The annuity market is incredibly busy, as clients seek to capitalise on the relatively high incomes currently on offer. Given where we’ve been in the recent past, this is clearly a positive story for the many customers seeking retirement income security. While I don’t have access to a crystal ball to predict the future, annuity rates are closely linked to the returns available on government bonds. As the Bank of England sets the base rate, this in turn changes the yields on these bonds, or gilts, as they are known. As a general rule, a 30 basis point rise in yields on gilts would increase annuities by 3%.
“While we continue to see inflation higher than the 2% target rate set by the Government, the Bank of England will tread very carefully before considering reducing the base rate. In fact, at the last MPC meeting3, two of the members voted to increase base rate. So, on that basis, annuity rates are likely to remain at or near recent historical highs. However, wider market forces can change rates, for example, competition from providers who offer annuities in the open market seeking market share.
“While it may be a fool’s paradise to predict annuity incomes in the future, what I know today is customers looking for income security, either at the point of retirement, or at the point of de-risking their drawdown strategy, can now get much better value from their choice of an annuity.
“Always seek the advice of an annuity specialist or regulated financial adviser before taking any decisions. These professionals will help guide you through the myriad of options available, whether that be 100% value protection, longer guaranteed periods, or simply taking your health and lifestyle into account, which may result in a better income.”
Enquiries:
Press enquiries should be directed to:
Elle McAtamney at Canada Life, elle.mcatamney@canadalife.co.uk
Notes to editors:
- Canada Life benchmark annuity rates over time, £100,000 purchase price, 10-year guarantee, no health or lifestyle factors. 15-year gilt yields sourced from ft.com.
- Source: https://www.abi.org.uk/news/news-articles/2024/2/2023-sets-new-post-pension-freedoms-record-for-annuity-sales/
- https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2024/february-2024
About Canada Life:
Canada Life is part of a group of companies controlled by Great-West Lifeco Inc., a diversified financial services holding company headquartered in Winnipeg, Canada. Through its subsidiary companies, Great-West Lifeco has operations in Canada, the United States, and Europe. Great-West Lifeco and its insurance subsidiaries have received strong ratings from major rating agencies. Great-West Lifeco has over 38 million customers worldwide and £1.532trillion assets under administration (as at 31 December 2022).
Canada Life Limited began operations in the United Kingdom in 1903 and looks after the retirement, investment and protection needs of individuals and companies alike. As well as providing stability and security through its individual contracts, Canada Life Limited has grown and maintained its position as the market leading provider of group insurance solutions.1 Canada Life acquired Retirement Advantage on 3rd January 2018 for an undisclosed sum. The acquisition added over 30,000 retirement income and equity release customers and more than £2 billion of assets under management including a £1.5 billion block of in-force annuities to Canada Life.
Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Canada Life International Limited and CLI Institutional Limited are Isle of Man registered companies authorised and regulated by the Isle of Man Financial Services Authority. Canada Life International Assurance Limited and Canada Life International Assurance (Ireland) DAC are authorised and regulated by the Central Bank of Ireland.
Stonehaven UK Limited, registered in England and Wales no. 05487702. Registered office: Canada Life Place, Potters Bar, Hertfordshire EN6 5BA.
Stonehaven UK Limited is authorised and regulated by the Financial Conduct Authority.
- Canada Life MI & Swiss Re, 2022