Annuities See Shortened Breakeven Period Due to Rising Interest Rates
According to recent analysis, the breakeven period for pensioners purchasing annuities has shortened by seven years due to a significant rise in rates. Data from insurer Canada Life indicates that for an average 65-year-old investing £100,000, the time to recoup their investment has decreased from 21 years in 2021 to 14 years currently. This change is attributed to recent increases in interest rates, which have bolstered annuity returns to their highest level in 17 years.
The Financial Conduct Authority reports a 29% increase in annuity sales between 2021-22 and 2024-25. This surge is influenced by policy changes such as the anticipated inclusion of unspent pensions in inheritance tax, effective April 2027. This policy shift has sparked growing interest in annuities, as the initial purchase reduces the taxable estate value.
Annuities provide retirees with a lifetime guaranteed income, and many offer options to adjust payouts for inflation. Rates are influenced by yields on UK government bonds and have experienced significant fluctuations. Following a decline post-financial crisis, rates have surged in the past three years due to consistent interest rate hikes, peaking in 2025.
Currently, a healthy 65-year-old purchasing a £100,000 single-life annuity from Canada Life receives an annual payout of £7,373, compared to £4,662 in 2021, effectively shortening the breakeven period by about a third. The Office for National Statistics reports that the life expectancy for a 65-year-old woman is an additional 23 years, while for a man, it is 20 years.
Growing Appeal of Annuities
Nick Flynn, a representative from Canada Life, remarks on the increasing attractiveness of annuities, noting, “Attractive pricing and the certainty of a guaranteed income for life are increasingly valuable as people live longer and face extended retirements, making annuities a strong choice for those seeking financial stability and peace of mind.”
Across the industry, the average annual annuity income increased to £3,558 last month, a £60 rise over the previous year, as reported by financial analyst Moneyfacts. Additionally, the FCA highlighted that 88,430 pension pots were converted to annuities in 2024-25, a rise from 68,514 in 2021-22.
Rachel Springall of Moneyfacts underscores the enhanced appeal of annuities, citing elevated interest rates and gilt yields, which have raised annuity incomes. “The case to take one out has become even stronger now, particularly as unused pension pots will fall under inheritance from April 2027,” Springall explained, noting the potential for reducing estate value and subsequent inheritance tax liability.