Having experienced a prolonged period of low interest rates, it is quite easy to understand why flexible pension drawdown has made annuities seem a thing of the past. However, with the Bank of England base rate having increased from 0.1% to 4.25% over a relatively short period, now may be a good time to revisit this.

Let’s take a step back and look at what an annuity actually is.

Essentially, an annuity is an agreement to exchange a capital sum for a regular income. An annuity can be funded by pension money or non-pension money; however, you are likely to be more familiar with a pension annuity.

Why might you want to annuitise?

Like the State Pension, an annuity can provide you with a regular income, for a fixed period, whether that be over the short-term, say for five years, or the rest of your life. This income is not subject to investment risk which can be attractive where you value having a known income paid to you for a known period and dislike risk. The annuity can be tailored to your circumstances in that you can include increases in payment or a benefit for a dependant or spouse after your death.

Some providers offer value protection, including 100% value protection which means the insurer would pay out the difference between the initial purchase price and the total gross income received. For lump sums paid since 6 April 2016, the tax treatment of any lump sum death benefit depends on your age at date of death.

The higher the interest rate, generally the higher the annuity rate. This means the income available from an annuity may be considerably higher than it was this time last year.

Based on research carried out on 29 March 2023, a 60-year-old male, with a £100,000 pension pot (this is after the payment of any tax-free cash), with no health conditions, could expect to receive:

¹ The annual income stated above is from a competitive income paying provider at the time of research.

₂ Assumes female spouse, three years younger.

Many annuity providers will offer an enhancement to standard annuity rates after sharing details such as your height and weight, weekly units of alcohol consumed, smoker status and details of any medical conditions you may have. Completing a health questionnaire is encouraged if this is something you are considering.

Fixed term annuities

A fixed term annuity may be attractive where you still need a known income for a known period but do not wish to commit to a lifetime annuity. This could be for all or just part of your pension fund. This could be with a view to covering a period when you expect to incur higher expenditure. At the end of the selected period, you will receive a guaranteed amount (called a maturity value). This can be used to purchase another fixed-term annuity, lifetime annuity, to take as a lump sum payment or to move into an income drawdown product. You can include 100% value protection if you want to insure against death within the period.

Based on research carried out on 29 March 2023, a 60-year-old male, with a £100,000 pension pot (this is after the payment of any tax-free cash), with no health conditions, could expect to receive:

¹ The annual income stated above is from a competitive income paying provider at the time of research.

₂ If the maximum income is not needed, an alternative could be £6,251 p.a. and a higher maturity value of £85,135.

₃ If the maximum income is not needed, an alternative could be £6,096 p.a. and a higher maturity value of £72,973.

Annuitisation may not be right for everyone but for some it could be a good addition to their planning, in full or in part.

What next?

If this is something you would like to explore further, please feel free to contact Jade North or your existing Financial Planner at CBW Financial Planning Limited.