However, there is evidence to suggest the recent bull run may be nearing an end. This is because annuities are priced in relation to the yields on government bonds, called gilts, and other fixed-interest investments such as corporate bonds. The benchmark 15-year gilt yield rose significantly from 2.31pc at the beginning of January to 3.2pc in September.
There is a useful rule of thumb that can be used to predict annuity rate movements. For every 100 basis points rise in gilt yields (in other words, yields moving from 2pc to 3pc, say), annuity income should increase by about 8pc. There is a time lag between changes in yields and changes in annuity rate but this rule of thumb normally applies over a two-month cycle.
There is, however, a general consensus that annuities will be higher at some time in the future – it is just that nobody knows when that will be. This makes deciding the best time to purchase an annuity a difficult task.
For anybody considering purchasing an annuity, it may be prudent to take as much time as is needed in order to decide what is the right option. Once a decision has been made it might make sense to act straight away, as those who defer their annuity purchase in the hope of getting a higher income are often disappointed.
Bear in mind that £50,000 won’t even buy an income of £3,000 a year for a 60-year-old today. That hardly covers the cost of a two-week holiday today, let alone in 10 years’ time.
So it might be worth taking a longer-term view of your savings, since rates are at a low point in the cycle. Let me put it this way: if my son came to me when interest rates were at 10pc and said he was getting a fixed-rate mortgage, I’d say he was mad. In the same way, people are locking into annuity rates for 20 or 30 years with rates near their lowest ever levels.
This is one of the most important financial decisions you will ever make, so tread carefully.
Billy Burrows is head of business development at Annuity Line