Sales of pension annuities have soared as rising interest rates mean much better returns for
retirees – but many people remain sceptical about them.

Until recently, annuities, which typically pay out a set income for life to a pensioner, have been largely dismissed because of their poor value. But recent increases in interest rates, which have piled pressure on homeowners, have meant there are much better deals on the market. It is now possible for a 65-year-old to get £7,100 a year if they invest £100,000 – compared with £5,500 just 12 months ago.

The Association of British Insurers (ABI) says sales were up 22% in the first three months of the year, to the highest level in almost five years. And Canada Life, a leading provider, says it is seeing the highest sales since before the announcement of so-called pensions freedoms in 2015. But research shows
scepticism remains.

So are they a good option? And what should people consider before they spend their pension pot? People can buy one by paying an insurer a lump sum. The insurer then guarantees an income. That could be for life, or for a set period; it could be the same every year or be linked to inflation; and the payments could stop on death or be passed on to a spouse. The major advantage is a guaranteed income, with the possibility that a family member could continue to receive it after death.

However, you will be locked in for either life, or a set period – such as 10 years – and they may not perform as well as other products, such as an income drawdown plan, which leaves your money invested and takes income direct from your fund. For a number of years, the rates on annuities have been derisory, leading them to be dismissed as an option for many people approaching, or in, retirement. But with higher interest rates have come much better offers. A typical annuity for a 65-year-old with no health concerns now pays just under 7%. Figures from Canada Life show that it takes 14 years to get your money back from a typical investment, compared with 19 in 2018.