Annuity sales are on the rise
The sales of guaranteed income for life products are on the rise.
This is what the latest retirement income market data published by the Financial Conduct Authority reveals. Between April 2020 and March 2021, the sales of such products grew from 60,383 to 68,514. This is a 13% increase.
This maybe because of the recent economic turbulence as pensioners seek the value of a guaranteed income for life. As, not only does a guaranteed income for life provide security against market volatility and outliving pension savings, it gives pensioners peace of mind knowing they can count on an income for the rest of their life.
Annuity rates have been rising and are up around 40% this year, so it seems to make sense for any pension saver to take a look at how guaranteed income for life might fit into their retirement plan.
According to Canada Life, their annuity rates have reached a 14-year high, with a 52% increase over the past nine months. This means the break-even point has reduced by seven years, falling from 22 years to just 15 years. The break-even point is when pensioners receive their original pension, before any tax, back through income.
A benchmark annuity of £100,000 at age 65, for a non smoking, healthy individual, would now pay a guaranteed income of around £6,873 a year. This compares to £4,521 at the start of 2022.
Inflation-linked annuity rates have also improved by 77% over the same period. A benchmark £100,000 annuity linked to RPI will now pay a starting income of around £3,896 p.a. It compares to £2,195 at the start of the year.
How high could Annuity Rates go?
The current economic climate and rising Interest Rates have strengthened annuity rates significantly and there is now renewed interest in annuities given the income security they offer in the current market environment. The question has now probably changed to, how much to annuitise and when, rather than whether to annuitise or not for some pensioners.
Obviously, timing is absolutely crucial, annuity income does not have to be bought at the point of retirement, and annuity rates are increasingly attractive the later you buy.
Data from the FCA also showed that the number of pension pots accessed for the first time surged 18% in 2021/22. The total value of money withdrawn from pensions also rose by 22%, from just over £37bn to over £45bn.
The regulators could conclude that the rise in the number of people accessing their pensions for the first time will inevitably spark fears of savers raiding their retirement pots to make ends meet during the cost-of-living crisis. However, anyone accessing their pension earlier than planned or taking bigger withdrawals in order to cover higher living costs needs to think carefully about the impact this will have on the sustainability of their retirement income plan.
While in some cases, people may feel dipping into their pension is the only option, it’s also important to take the time to consider how decisions taken today will impact on finances further down the line.
In addition, the FCA data revealed that over 205,000 people entered drawdown (the alternative to annuities) in 2021/22. This is a 24% increase compared with the previous year. Moreover, 40% of regular withdrawals in drawdown were at an annual rate of 8% or more, down from 43% in 2020/21.
In my view, the key to making drawdown work is to carefully consider the sustainability of the withdrawal plan, whilst understanding and being comfortable with the risks that are being taken, and to review the investment strategy regularly.
If investments perform poorly, particularly in the early years of retirement, income may need to decrease to keep future withdrawals on a sustainable path. Similarly, if the investment strategy delivers large returns then you could be able to withdraw a bit more, obviously, a suitable investment strategy is absolutely fundamental for a good outcome with the Drawdown route in retirement.
As a very rough guide, we’d usually say a healthy 65-year-old can safely withdraw around 4-5% of the value of their fund each year and be confident it will last throughout their retirement, assuming a non-aggressive investment stance.
If you should require any further advice regarding Annuities or Income Drawdown plans please get in touch.
Take care everyone!
Craig
