With an annuity, people hand over a lump sum and then are provided with a regular guaranteed income in retirement. However, previous low interest rates meant people parted with a lot of money and saw little in return.
Recent rises in interest rates have caused bond yields to rise and this has led to an increase in the rates offered on annuities.
The Bank of England raised interest rates by 0.5 percent to four percent at the beginning of the month. With the base rate rising annuity rates also remain almost 40 percent higher than the same point last year.
Data from Hargreaves Lansdowne shows a 65-year-old with a £100,000 pension could get an income of up to £6,892 a year from a single life level annuity.
This compares to £5,004 at the same time last year.
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Annuities have always offered the security of a guaranteed income in return for a lump sum, and now they’re offering a better income too.
Helen Morrissey, Senior Pensions and Retirement Analyst said: “These quotes also assume a five-year guarantee and that income is paid monthly in advance.
“But bear in mind that income depends on your circumstances, quotes are only guaranteed for a limited time and rates change frequently so they could go up or down in the future.
“It’s also important to consider your options carefully as you can’t usually change an annuity once it’s set up.”
She explained that people interested in securing a level of guaranteed income for retirement through an annuity could benefit from going online to see what kind of rates are on offer.
Different providers offer different rates, and someone could get more if they’re older or have a health condition.
The best deal on offer isn’t always available from the same provider. It’s vital to get a comparison from across the market to make sure people get the best deal.
Although there is guaranteed income, Britons are warned of the downsides that come with annuities such as all one’s money being tied up without access.
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The Hargreaves Lansdown website explained that although an annuity offers security, it lacks flexibility.
Even if circumstances change, people can’t normally cancel or amend their annuity once set up. So they should think carefully before they go ahead.
When providing information on the cons, it states: “Normally you can’t change your options if your circumstances change.
“Annuity rates might rise in the future, but you won’t benefit from this if your annuity is already being paid.
“Unlike flexible retirement options, you can’t cash in your annuity.”
People can normally choose for their income to increase each year, either by a fixed percentage (normally three percent or five percent), or by linking it to inflation (the Retail Prices Index (RPI)).
Choosing one of these options means people starting income will usually be lower, but it will be better protected against inflation.
Even though rates have risen, the right time to buy an annuity really depends on someone’s circumstances.
A good time to consider buying an annuity might be when someone gives up work completely. It should be noted that people usually only access a pension like this from 55 (57 from 2028).
They’ll no longer have a steady income stream from earnings to cover their essential bills so an annuity can help plug this gap.