High Interest Rates in the UK Contribute to Popularity of Pension Annuities

High Interest Rates in the UK

Soaring interest rates in the UK have led to a drive in annuity sales as savers rush to secure a higher retirement income.

Figures from The Association of British Insurers show a 22% surge in UK annuity sales in the first quarter of the year, with 16,256 annuities sold. It’s a four year high for the market as rate rises prompt more people to opt for a secure and guaranteed retirement income rather than risk investing their pension fund.

It comes after the Bank of England hiked rates to 5.25% – the 14th consecutive base rate increase for the country. With annuity rates being linked to the base rate (as well as gilt yields), annuity customers have been rushing to lock in the higher rates that can be fixed for life. 

Pension savers will be rubbing their hands together at the news that further rises are forecast by UK financial markets. Some analysts are talking of a Base Rate peak of around 6% by early 2024.

UK retirees spending more on annuities

ABI figures show that annuity premiums hit £1.2 billion in the first quarter of this year – the highest value seen since 2015. It means retirees are choosing to spend more of their pension funds on annuities thanks to the higher rates now available.

News about rate rises may also be fuelling more competition in the annuity space. Figures from the ABI reveal that in Q1 2023 more than 10,000 people bought an annuity from a different provider to the one they saved their pension fund/s with. This equates to 64% of total sales and the highest volume of people shopping around for their annuity since 2016. This compares to 55% of sales from individuals’ pension scheme provider just a year ago.

Of course, not everybody gets the same annuity rate when they come to purchase an annuity. The rate offered depends on a person’s age, pension fund, personal details and the provider they approach. It makes shopping around crucial to securing the highest income possible.

The impact of annuity rate rises on income

Accessing a higher rate when annuitizing can see customers receiving potentially thousands of pounds more across their retirement. 

For example, data from annuity broker Retirement Line shows that a 65-year-old purchasing an annuity now could achieve an annual income of £7,711.32 from a £100,000 pension fund (source: best available annuity rates from Retirement Line, August 8, 2023). Annual income in the region of £5,000 or less from a £100,000 pension fund would have been typical just two years ago.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.