Interesting times

The Bank of England has reduced its current bank rate to 1.5%, the lowest since it was founded in 1694.  Whilst this is good news for borrowers, it is bad news for those in retirement who are living off the interest on their savings.  In fact, low interest rates are doubly bad for savers: not only is interest income reduced, but government rules on withdrawing benefits assume that people earn more interest than they actually now do.  A rate of 1.5% interest would yield just £150 a year of taxable interest on a lump sum of £10,000.  What are pensioner savers to do?

One solution is to buy an annuity.  That same sum used to buy the best annuity for a 60-year-old would yield taxable annuity payments over four times greater than the deposit account.  People find all sorts of reasons not to buy annuities, but it's hard to argue against quadrupling your income.  The best annuity rates for other ages are listed below (all rates applicable in mid-January 2009 to single lives without a guaranteed term):

When faced with such an offer it is hard not to be sceptical, especially when so many giant financial institutions have hit the buffers in 2008.  However, it is perfectly genuine because insurers use long-term interest rates to calculate annuity prices.  Buying an annuity is as much an investment decision as anything else, and rarely have annuity rates been so attractive when compared against savings rates.