Rate rises mean annuities break even sooner

The net result of the annuity rate improvements means the payback period on a benchmark £100,000 annuity is 14 and a half years, for a 65-year-old which generates an income of £6,907 a year.

This compares to the same annuity paying an income of £5,240 five years ago, with a break-even point of 19 years, and the same annuity paying an income of £5,670 a year ago, with a pay-back period of 18 years.

At current rates a benchmark annuity for someone aged 65, with no pre-existing health or lifestyle conditions, would pay in the region of 6.9 per cent.

This annuity rate can increase significantly when disclosing common health or lifestyle conditions, such as diabetes, high blood pressure or being a smoker. Age can also have a big influence on the annuity rate offered.

Nick Flynn, retirement income director at Canada Life said "annuities were firmly back in fashion".

He said: “It’s been a long time coming but annuities are firmly back in fashion, driven by the significant improvement in rates. This is evidenced by the break-even point, the tipping point at which you receive your original investment back through income. This has moved forward by nigh on five years, which shows just how much the market has moved in a relatively short space of time."

“Annuity rates are currently at levels not experienced since the banking crisis of 2008/9, which shows just how far we’ve come. It’s difficult to predict where annuity rates will go, but markets have already priced in interest rate movements, while yields on gilts have stabilised.

“Retirement choices shouldn’t be a binary decision between annuity and drawdown. Rather than adopting an either-or approach, consider blending annuity and drawdown to provide the best of both worlds, a risk-free retirement income and flexibility. Annuities can also be bought in tranches, so securing a better rate as people age."