PENSIONERS can earn a guaranteed income of up to £8,150 for life as annuities have soared due to ongoing market turbulence.
An annuity is a product you can buy with your pension pot that gives you a guaranteed income in retirement.
4
4
The income you could get depends on the value of your pension pot, your health, life expectancy and circumstances.
A 65-year-old who exchanges £100,000 of their pension pot for an annuity can now get a guaranteed income of up to £8,150 a year, according to financial planner Retirement Line.
The same investment five years ago would have earned you just £5,000 a year.
Annuity rates are currently at 8.01%, a 23-year high, according to Standard Life.
Read more on retirement
PENSION TENSION
State Pension mistake could see you lose £100s a year under new tax rules
PENSION WINDFALL
Exact amount YOUR state pension is set to go up in April under triple lock
Annuity rates have been rising due to volatility in the gilt market.
Gilts are bonds issued by the government to borrow money from investors, which it promises to pay back with interest.
The yield is effectively the interest rate you can earn on them.
The yield on 30-year gilts peaked at 5.89% on Tuesday – the highest since 1998.
Most read in Money
FOOD BLOW
Supermarkets risk EMPTY shelves as ‘catastrophic’ events push supplies to brink
BEST BAR NONE
Twelve UK bars named in list of Europe’s top boozers – have you visited one?
SWEET SURPRISE
Five-bed home looks normal from the outside… but hides a sickly secret
TAX FEARS
All the taxes most likely to go up in the Budget – how to protect YOUR money
Meanwhile, the yield on ten year gilts peaked at 5.294% on Wednesday, the highest since August 2007.
Gilts have been rising because investors are worried about higher oil prices due to the conflict in the Middle East resuming.
If gilts are rising then it means it’s more expensive for the government to borrow money, which means it has less spare cash to get the public finances back on track.
As a result, it could be forced to raise taxes or reduce spending.
Gilts have a direct impact on annuity rates as insurance companies invest your pension lump sum into government bonds to guarantee your retirement income.
Rates are often closely linked to 15 year gilt yields, which are at record highs.
Pete Cowell, head of annuities at Standard Life, said: “With annuity rates remaining at historically high levels, many retirees are reconsidering the role they could play in their retirement plans.
“We’re seeing this with more older customers and those with larger pension pots choosing to secure at least part of their retirement income with an annuity.”
Is an annuity right for me?
4
An annuity could be a good option for you if you want to guarantee an income for life.
You will be paid the same amount each year, irrespective of what happens to rates or the economy.
Meanwhile, pensions are also being brought into the scope of inheritance tax from April 6, 2027.
At this point any money in your pension you’ve not spent will be counted in the value of your estate.
The tax is paid on the total value of your estate, which is made up of any property you own, money and possessions you have.
There is no inheritance tax to pay if your estate is worth less than £325,000.
Meanwhile, it is charged at 40% on the proportion of your estate that is above the £325,000 threshold.
You can also get an extra £175,000 allowance if you leave your main home to your children or grandchildren.
There is also no tax to pay if you leave your estate to your spouse or civil partner.
Currently just one in 20 estates pay inheritance tax.
The number of families forced to pay inheritance tax is forecast to double by 2031 thanks to the tax change.
But it’s important not to make rash decisions in order to try and avoid inheritance tax.
Peter Cowell said: “While upcoming changes to the Inheritance Tax treatment of pensions are prompting some people to review their retirement plans, it’s worth remembering that only a minority of estates are expected to pay Inheritance Tax.”
He added that for those who are affected an annuity can give you a guaranteed income and can be gifted to family members.
What are the pitfalls?
4
An annuity might not be right for you if you have a complex health condition or shorter life expectancy.
The longer you live the better return you get on your initial investment.
For example, you could spend £100,000 on an annuity that pays £8,000 a year.
After 20 years you would have received a total of £160,000 — £60,000 more than you paid for the annuity.
But if you lived for just seven years after you had taken out the annuity, you would have been paid a total of £56,000.
This is £44,000 less than you paid for the annuity.
It’s important to disclose any health and lifestyle information when buying an annuity as this can improve the amount of income you can get.
Meanwhile, an annuity may not be a good option for you if you think you’ll need more income in the future.
If you die early then your annuity might not pay out to your loved one after you pass away.
RECOMMENDED STORIES
You can choose to add this but often it means you’ll earn a lower yearly return.
Always shop around and get financial advice to make sure you’re getting the best deal.