The Bank of England Base Rate – The Return of the Annuity?
In the June 2022 meeting of the Monetary Policy Committee at The Bank of England the base interest rate in the UK was raised for the fifth time since December. The base rate now sits at 1.25%, the highest rate since the 2009 global financial crisis and way above the 0.10% base rate implemented at the start of the Coronavirus pandemic . The base rate affects individuals in several ways, one of which is the income that could be paid from an annuity contract.
What is an annuity?
Broadly, an annuity is a guaranteed income for life paid by an insurance company. The amount of annuity is determined by several factors, one of the most important is the annuity rate. The annuity rate is the amount of income per year an individual receives per £100 paid to the insurance company. The annuity rate is linked to the yield on a government bond. When interest rates rise the yields on government bonds also rise and therefore annuity rates increase.
Since 2009 annuity providers have been operating in an ultra-low interest rate environment. Therefore the annuity rates offered have been equally low. Annuities have therefore been less attractive for many clients looking at securing an income, particularly in retirement. Following five consecutive base rate increases, and with further rises anticipated, annuity rates across the market are beginning to rise.
The attractiveness of an annuity is returning and highlights the importance of considering all your options in the run up to retirement.
Interested to know more?
If you would like to discuss annuities, pension planning or financial planning more widely, please feel free to contact us.