A £100,000 pension pot can now secure a significantly higher retirement income through annuities compared to recent years.
Sales soared by nearly 39 per cent in 2023/24, with 82,061 annuities sold compared to 59,163 in the previous year.
Annuities, which provide a guaranteed income for life, have seen a resurgence in popularity.
However, retirees are advised to act swiftly, as these rates may decline in the coming months when the Bank of England is expected to cut interest rates.
A 65-year-old with a £100,000 pension pot can currently obtain up to £7,146 per year from a single life level annuity. This represents a substantial 43 per cent increase from just three years ago, research from Hargreaves Lansdown has shown.
While annuities offer attractive rates, experts caution against hasty decisions.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown explained that over 80 per cent of recent purchases were level annuities, which don’t adjust for inflation.
This could erode purchasing power over time, especially given recent inflationary pressures.
Additionally, about 66 per cent were bought on a single life basis, potentially leaving spouses without income if the annuitant dies first.
Morrissey advised: “It’s vital that you consider what you need from your retirement income and look across the market before deciding to purchase an annuity rather than taking the first or highest income offered.
“Annuity comparison tools can allow you to do this easily and effectively.”
Retirees are encouraged to carefully assess their needs and explore various options before committing to an annuity.
While annuities have gained popularity, income drawdown remains a widely chosen option for retirees. This approach offers greater flexibility but comes with its own risks.
Data shows that over 225,000 pension pots had an annual withdrawal rate exceeding eight per cent in 2023/24.
Morrissey cautioned against such high withdrawal rates and said: “There could be times during retirement when you need to take a bit more from your income to cover big expenses such as holidays, but doing it on a sustained basis can lead you to erode your savings pretty quickly and leave you in trouble later on.”
She recommended a more conservative approach explaining: “As a rule of thumb, withdrawals from a drawdown pot should be around four per cent per year or in line with the natural yield on investments to remain sustainable long-term.”
When considering retirement options, it’s crucial to understand the full financial picture.
The state pension, while important, is unlikely to cover all expenses, the full new state pension pays £23,004 annually per couple.
Research from Hargreaves Lansdown showed for those aiming for a middle-range yearly spending, an additional combined pot of around £89,000 per household is needed. Higher spenders may require an extra £523,000.
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Annuities can play a vital role in supplementing the state pension.
With current rates, a £100,000 pot could provide up to £7,358 annually for a 65-year-old, a significant increase from £6,225 in July 2022.
However, retirees should act promptly, as these rates may decrease if the Bank of England reduces interest rates in the coming months.