A £100,000 pension pot can now secure a significantly higher retirement income through annuities compared to recent years.
With the Bank of England expected to cut interest rates further in 2025, now may be the best time to secure a quote and see how much you could get.
According to data from Hargreaves Lansdown, the average 65-year-old with a £100,000 pension pot can get up to £7,281 as annual income from a single-life level annuity with a five-year guarantee.
Three years ago, the same pension saver would have received just £5,131.
Annuity rates change regularly, and quotes are only guaranteed for a limited time, so they could be higher or lower in the future.
The exact income one could receive will depend on the value of their pension, their personal details and the options they choose.
Annuity rates change regularly, and quotes are only guaranteed for a limited time
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Matt Sheach, financial consultant at Lumin Wealth, said: “With annuity rates offering good value for money over the past couple of years, savers may opt to lock into an annuity, with the anticipation that rates will fall over the coming months and years, in light of expected interest rate drops.”
A total of 82,061 annuities were sold in 2023/24, up 39 per cent compared to a year earlier, according to the Financial Conduct Authority (FCA).
Annuities could get a further boost due to the Budget announcement that pension pots will be liable for inheritance tax from April 2027.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “This will remove many people’s rationale for using income drawdown as they used it to pass the pension down generations tax-efficiently rather than draw an income from it.
“As they revisit their retirement income plans, many may opt to secure a guaranteed income through an annuity instead.”
Older people can often access higher annuity rates.
For example, that same £100,000 pot mentioned earlier could generate an annual income of £9,082 from an annuity for a 75-year old, or £9,392 if there is a disclosed medical issue.
The Bank of England held interest rates at 4.75 per cent in December – following two falls in 2024.
One of the main restrictions of annuities is that people are stuck with the rate they get once they purchase the product.
Timing is important and it’s good to get a sense of whether rates are due to rise or fall whenever you’re considering an annuity purchase.
Lily Megson, the policy director at My Pension Expert, cautioned: “Inflation is proving sticky, and while the base rate is predicted to drop throughout 2025, the Bank of England will not rush these decisions.
“Savers, particularly those nearing retirement, will need to consider the coming year and factor in fluctuating interest rates as they pursue their financial goals.
“Some people may be considering taking advantage of higher interest rates in the short-term, while others might be contemplating longer-term options for growing their pension pots. Importantly, however, these are not decisions they should have to make alone.”
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