Pensioners could see a rise in their income as interest rates look set to increase. After a decade in the doldrums the rates on annuities – insurance policies that put an annual income for life in exchange for a lump sum – may finally be about to rise again. While the peace of mind this guaranteed income brings should not be overvalued, for many annuities are too rigid. Keeping money invested in a pension account instead of handing it to an insurance company allows far greater control and offers far better protection from the taxman. But inevitably, higher returns on annuities put the income available from a stocks and shares portfolio under pressure.
The income produced by an annuity is determined partly by competitive pressure among providers but far more significantly by long-term interest rates. Interest rates have been cut to record lows falling to 0.25pc in August last year.
Insurers have to hold large reserves of government bonds to match the annuity income they pay out to customers.