Are annuity discounts high? Lowering interest rates will lower future payments

Annuity prices have started to fall in value as issuers anticipate interest rate cuts by the Bank of England this autumn.

The headline inflation rate has been hovering around its target rate of 2 percent, prompting policymakers to cut interest rates from 5.25 percent to 5 percent earlier this month.

On £100,000 a healthy 65-year-old can still lock in an annual income of more than £7,150 a year, but that has fallen to £7,270 in mid-June, according to the best-selling figures – see below.

The Bank of England looks set to cut two more interest rates this year, according to Hargreaves Lansdown’s head of pension research, Helen Morrissey.

Higher interest rates mean that annuity providers can support attractive rates, and he notes that annuity rates have fallen but still offer good value.

He says: ‘With interest rates continuing to fall, the expectation is that we will see annual rates begin to fall in the coming months.

But he adds: ‘We don’t expect the Bank of England to cut interest rates as quickly as they have raised them. Any drop in income should be gradual so you don’t feel pressured into making a hasty decision.

‘Once an annuity is purchased it will not be easy so you need to make sure you consider all the factors involved in your decision.’

Annuities provide guaranteed income until you die.

But they were shunned for years because of poor standards and restrictive conditions, and after gaining notoriety in the wake of annuity mis-selling scandals.

Pension liberalization changes in 2015 have encouraged many savers to keep their money invested and live on the draw, despite the risk of the stock market.

However, interest rate hikes to combat inflation have led to better deals and an uptick in sales over the past few years.

Industry figures show that for £100,000, a healthy 65-year-old can buy a pension of around £7,100 a year, excluding inflation protection and a five-year guarantee period – to protect your money immediately after the purchase.

For the same amount, a single person with a partner three years younger could buy a joint annuity with inflation protection but no guarantee which provides £4,570 a year, according to the latest best buys from Hargreaves (see below).

Annual income from £100k pension pot

Morrissey says: ‘When you look at the range of options, it’s tempting to choose the one that offers the most money from the start. However, you should consider all your circumstances.

If you buy a single life annuity but die before your spouse is left with nothing, it shows.

He also says: ‘You don’t have to pay all your pension at once. Investing in installments will also enable you to benefit from higher annuity rates as you get older.

You can use cash and annuities in your retirement plan.

Annuities can be used to keep a guaranteed amount of money to help you meet your daily needs while the rest can always be invested to reduce money where there is potential for growth, and you can withdraw down if necessary.’

Morrissey adds: ‘Tell the truth about your life. Adding information about whether you smoke or have a condition like diabetes can really boost your earnings.

‘Details such as whether you’ve had a stroke can push your income up to £8,400 a year while someone who smokes ten cigarettes a day could get £7,600.’

Here are Money’s tips on what to consider before buying an annuity below, and check out the following guides.

> Read the 12-step guide to investing in your pension

> Find out how to combine annuities and annuities

> Check how much the annuity is linked to inflation