Retirement income boosted by high annuity rates

Data from specialist annuity broker Retirement Line shows that at 2 February 2025, the best available rate for a 65-year old male using £100,000 to buy a single lifetime annuity was 7.82%. That means a guaranteed income of £7,823 per year for life.

To illustrate how high rates are at the moment, that compares to an annual income of £7,545.80 last July. That was at a time when rates were already notably higher than has typically been the case over most of the past decade or so.

In October 2022, Canada Life reported that their benchmark annuity of £100,000 for someone aged 65 would pay £6,873 - in January 2022 this figure was just £4,521.

How do annuities work?

Annuities turn money in a ‘defined contribution’ pension into guaranteed income, either for life or a fixed term. Your income is locked in and won’t be affected by ups and downs of interest rates or performance on the stock market. You can also lock in a guaranteed rate of return for a fixed term and take no income in the meantime.

This contrasts with the other main retirement income option, known as income drawdown. Your money is invested with this option, so it carries investment risk. On the other hand, there is the potential for growth higher than the annuity rate if markets do well.

Interest rate cuts may not affect annuity rates

Despite the interest rate cut to 4.5% on 6 February, annuity rates won’t necessarily follow suit as annuity providers base their rates on a range of factors.

In particular, rates tend to more closely align with changes in gilt yields – a type of interest on government bonds. That’s because annuity providers typically buy bonds to fund their clients’ annuities as they are among the safest types of investment.

The 15-year gilt yield closed at 4.794% on the day of the interest rate cut and held at 4.791% at close the following day (Source: MarketWatch). Looking back to 2024 for comparison, the same gilt yield started the year at 3.925% on 1 January and was at 4.481% on 2 December.

The CEO of the UK’s biggest specialist annuity broker is optimistic about how well gilt yields might hold up in 2025. In his 2024 Annuity Market Report, Retirement Line CEO David Slater said: “If inflation remains stubbornly above the Bank of England’s 2% target, common sense might suggest that a significant drop in gilt yields could be unlikely.”

Mr Slater also mentions the increased interest in annuities promoted by higher rates. He points to data from the Financial Conduct Authority showing that annuity sales increased by 38.7% from 2022/23 to 2023/24.

He says: “I may be biased as CEO of an annuity brokerage, but I can’t help feeling that the trend towards annuities could be in some consumers’ best interests. Many credible surveys show that people want certainty about their income in retirement.

“Today’s high annuity rates are prompting more people to think carefully about their pension income options. That can only be a good thing, as any decision about retirement income should be considered and well-informed.”

The importance of shopping around for an annuity

Pension savers need to make their own decision about which option is right for them, with professional guidance or advice if they need it. Some people will take a ‘blended’ approach with some of the money used to buy an annuity, and some left invested in a drawdown plan.

When choosing an annuity, consumers are advised by experts to shop around for the best annuity rate, potentially with support from a financial adviser or annuity broker.

Retirement income specialists Just Group say that the difference between the worst and best annuity rate on the market has widened. The income gap between providers is now almost 20% for a 75-year-old and 13% for a 65-year-old, their report shows.