Annuities have made a comeback as bond yields have soared, with one provider saying nearly a million people are considering annuities for the first time, but misconceptions about the product remain. 

  

Nearly one million (990,000) people aged over 55 and in work are considering annuities for the first time in preparation for their retirement. This is in addition to 828,000 of working over-55s who had always planned to buy an annuity in retirement, research from Legal & General Retail shows. The figures represent 16% and 14% respectively of working people approaching retirement.  

 

The sudden increase in popularity comes as annuity providers’ rates have increased dramatically. L&G’s annuity rates typically went up by around 40% from October 2021 to October 2022, and over 60% since 2016, the provider said. Canada Life's average benchmark annuity rates are up 44% since January 2022, reaching a 14-year high in October last year. The provider said its quote volume increased by 58%. 

 

Insurers price annuities based on the yields they receive on bonds that either they or their reinsurers hold to match the liabilities. Quantitative easing artificially suppressed yields from spring 2009 onwards, making annuities an unattractive option, but this is changing as central banks have been raising rates and the Bank of England started selling some of its pile of gilts last November, while the former government’s September Mini-Budget had sent yields skyrocketing. 

 

 

Aside from the improvement in rates (18%), people considering an annuity said they are drawn by the stability of a guaranteed income, making it easier to plan their finances (78%) and the assurances the product offers in a volatile market (36%).  

 

However, a proportion of pre-retirees continue to believe annuities offer a bad deal, and even though two out of five pre-retirees (44%) want a guaranteed income for life, only half of them are considering an annuity. 

 

Lorna Shah, managing director of retail retirement at L&G Retail, said there is still a lack of understanding about what an annuity is, what it can offer and the different types that are available. 

 

“This means people risk having an ‘either, or’ approach to funding their retirement, when in fact a blended approach might be more suitable,” said Shah. 

  

Annuities made a strong comeback during 2022, which shows in an increase in activity on the open market, agreed Emma Watkins, managing director of retirement at competitor Scottish Widows. 

 

“Consumers value the guarantee that annuities offer in an increasingly volatile market, and the decline of defined benefit pensions makes annuities even more attractive,” she said, who expects this trend to become even more pronounced. 

  

A combination of annuity and drawdown, rather than just one or the other, might serve people’s needs best, argued Watkins: “The market, brokers, advisers and individuals are starting to see that this mixture can lend itself to better results, and this is likely to be a key theme for the next 12 months.”    

 

For those seeking income security in retirement, annuities can play a key role in retirement planning, said Nick Flynn, retirement income director at Canada Life, but advised to shop around for not only the best rate, but also the right shape and type of annuity.  

 

“Purchasing an annuity is a significant financial step and it is the role of advisers to help their clients understand the choices available and select the right annuity for a customers’ individual needs,” said Flynn. 

 

One such financial adviser, Billy Burrows at Manchester-based Eadon & Co, said demand for annuities has grown.  

 

“Now that yields have increased, annuities are much better value for money because people are getting back their original capital plus a decent amount of interest,” he said, which he estimated to be around 3%. 

  

“The flipside of an annuity is pension drawdown, which means that the higher the income from an annuity, the harder it is for drawdown to provide similar income," he added.  

 

However, annuity rates do not move in a vacuum, Burrows pointed out. “One of the reasons for higher bond yields is the expectation of high inflation in the future. This means that although people can buy a higher-level annuity, the spending power of this will reduce quicker over time if inflation remains high.” 

 

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