Annuities rates set to drop after record highs – see if you should lock in a deal now

With interest rates expected to drop this year, people planning their pensions may be looking at securing an annuity product before too long.

Express.co.uk spoke to market experts and annuity providers about how rates will likely change for the months ahead and what people should do.

Neil Rayner, head of Advice at wealth management firm True Potential, said annuity rates may drop as interest rates fall. He explained: “Simply put, annuities are closely tied to the performance of investments like bonds.

“When interest rates go down, so do the returns on these investments. This leads annuity providers to offer lower rates. This is especially important for immediate annuities, where you commit to a rate for a long time.

“The effect isn’t always straightforward and can be affected by various factors. For those who have decided that an annuity is the best option for them may want to consider locking in these high rates.

“Alternatively if you are unsure it may be more prudent to wait and see how interest rates change over the course of the year.”

Experts at annuities provider Scottish Widows said rates are unlikely to drop “significantly”. Emma Watkins, head of Retirement, said: “Although we can’t predict rates, it’s unlikely that rates will fall to levels we saw in the recent past (below 50 basis points).

“Therefore, annuity rates should remain compelling, in particular for those looking to incorporate a level of security into their pension income i.e. covering fixed costs over the course of their lifetime, particularly given the recent market volatility.”

Given annuities are a lasting commitment, the group encouraged those looking at getting an annuity to make sure the product is right for them.

Ms Watkins said: “Individuals should be comfortable that they have a guaranteed income for life in exchange for future flexibility. For those approaching retirement and exploring annuities, the following should be considered:

“Firstly, what the individual’s lifespan may be? This is a useful exercise, so they can compare annuities to a sustainable rate of drawdown from a lump sum.

“Typically, individuals tend to underestimate their potential lifespan – comparing it to previous family generations without incorporating more recent improvements. The Scottish Widows pension calculator can be of use here.

“It is also instructive to think about any illness / lifestyle factors that might result in an enhanced annuity (the worse your health, the more money you may receive) being better for them. Also, one should consider a joint annuity in cases where a partner will be relying on their income.

“Finally, with the sustained rise in costs of living, more individuals are wisely looking towards products tied to an inflation measure or a guaranteed year-on-year rise.”

Ben Harrison, chartered financial planner at Equilibrium Financial Planning, also crunched the numbers and believes the drop in interest rates may not be as drastic as people expect.

He said: “Although interest rates are expected to be cut this year, the fall is unlikely to be as drastic as the rapid year and a half climb from 0.1 percent to 5.25 percent previously experienced.

“Economists have predicted that interest rates will gradually fall to four percent by November. Whilst any cut to interest rates would likely lead gilt yields and annuity rates to fall, it is important to remember that the lowest annuity rate available in 15 years still sat at 4.5 percent.

“With a pot of £100,000, this bought a guaranteed income of £4,500. Comparatively, the current 7.3 percent rate means that annuities remain an attractive option for retirement incomes.”

He pointed out that annuity rates are influenced by other factors beyond gilt yields. The expert said: “Therefore, those looking at applying for an annuity shouldn’t solely rely on interest rate predictions to inform their decision.

“For example, age, health, lifestyle, and postcode factors can all influence the annuity rate that individuals will be offered.

“To truly know whether annuities are the right choice for their future, individuals should always seek advice from a financial adviser to assess their suitability in greater detail.”

Ms Watkins also encouraged people to think about their wider retirement plans when considering an annuity. She said: “Ultimately, annuities aren’t an either/or question.

“They can be part of a blended retirement solution and individuals should consider what this might look like, for example using annuities as a bridge to getting to state pension age, covering remaining fixed costs such as final mortgage payments, and gradually transferring to a 100 percent annuity over time.”

Mr Rayner said those who already have an annuity should read up on how the product works. He said: “For those already holding annuities, review your policy to understand how interest rate changes affect it.

“Remember, the right strategy depends on your individual financial situation and long-term goals.”

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