Annuities rates soar 44 per cent in 12 months

It’s a financial product that is sometimes overlooked. But the current economic climate has sent the value of annuities soaring over the past 12 months – and investors are taking notice.

With interest rates continuing to climb, stock markets continuing to fall and inflation heaping pressure on the value of a dollar, the annuity is getting its moment in the sun.

An annuity is a financial product purchased with your super or savings that provides a guaranteed income for the term of the product. An annuity has traditionally been one of the less popular investment choices.

Read: An annuity could help you increase your Age Pension

A majority of YourLifeChoices readers (56 per cent) told us in the Older Australians Insights Survey 2021 they would never consider buying an annuity, while just six per cent said they had one.

But those results looks set for an abrupt about-face.

Research form investment firm Hargreaves Lansdown reveals the average annuity payment rate has jumped 44 per cent in the past 12 months and is currently at its highest level since 2009.

Annuity rates are influenced by interest rates, and interest rates have been rising all around the world.

Read: Annuity vs account-based pension

Helen Morrissey, senior pensions and retirement analyst for UK financial services company Hargreaves Lansdown, told The Guardian that annuity rates are climbing and showing no signs of slowing.

“The potential income for someone aged 65 with a £100,000 pension pot (around $A180,000) has risen by £200 a year (about $A360) in the past week alone,” she says. This would provide an annual income of just under $A13,000.

Ms Morrisey says her firm has provided more than 18,000 annuity quotes in the past three months, which represents a 70 per cent increase compared with this time last year.

Retirees have been hesitant to buy an annuity as it means that money is locked away for the period of the annuity, which could be forever. But you don’t have to put all your money into an annuity in order to benefit and there are several types of annuities.

“Some retirees are dissuaded because once you’ve bought an annuity, the rate is locked in for ever, so those sitting on lower rates from last year can’t benefit from more recent rises,” Ms Morrissey says.

“It’s always worth bearing in mind that you don’t need to lock an annuity in with your entire pension pot all at once. One sensible approach is to do it with chunks of your pension in stages, securing income to meet your needs, as and when it makes sense for you.

“This gives you the opportunity to secure higher rates as you get older, and you may also qualify for an enhanced annuity if you develop a medical condition at a later point, boosting your income again.”

Read: Retirement dos and don’ts in the face of rising inflation

The UK development looks likely to be repeated in Australia with the government’s Retirement Income Covenant obliging superannuation firms to offer more decumulation strategies.

A greater focus on annuities is proving to be part of the strategy.

Retirement and wealth management experts David Blanchett and Michael Finke explain that an annuity reduces the risk of an unknown lifespan.

“Annuities may also give retirees a psychological licence to spend their savings in retirement,” they said.

Have you purchased an annuity for retirement? Would you consider purchasing one? Let us know in the comments section below.

Brad Lockyer
Brad Lockyer
Brad has deep knowledge of retirement income, including Age Pension and other government entitlements, as well as health, money and lifestyle issues facing older Australians. Keen interests in current affairs, politics, sport and entertainment. Digital media professional with more than 10 years experience in the industry.
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