Pension savers hoping that annuity payouts will increase following last week’s move by the Bank of England are being warned rates may have peaked.

Advisers recommend that savers who have been deferring buying an annuity should lock into rates now, as they are unlikely to get a much higher income by waiting.

Billy Burrows of William Burrows Annuities, a specialist adviser, said: “Many people mistakenly believe there is a direct link between annuity rates and Bank rate. They think when one rises so does the other.

“But other factors such as life expectancy and government-bond yields are the main influence on annuity rates. I can’t see them going much higher from here unless inflation continues to be a threat.”

Rising inflation has helped to push up the yield on government bonds, also called gilts, over recent months. At the start of the year, 25-year gilts were yielding 4.6 per cent. Now they yield nearly 5 per cent.

This has been reflected in a corresponding rise in annuity rates. At the beginning of the year a 65-year-old man with a £100,000 pension fund could have bought a standard joint-life annuity from Legal & General that paid an annual income of £6,064. Today, the best policy from Legal & General would pay £6,227 – £163 a year more or an increase of 2.7 per cent.

The rise in annuity rates has nowhere near matched the increase in the Bank of England rate. The average annuity rate is up 2.5 per cent while Bank rate has gone up from 5 per cent to 5.5 per cent – a 10 per cent jump. However, given the 50 per cent decline in annuity payments since 1990, the increase, even if modest, has been welcomed.

However, if inflation is brought under control, gilt yields could fall, which means that annuity rates might also start to drop.

Tom McPhail of Hargreaves Lansdown, an adviser, points out that inflation is the real issue for retirees because even though a traditional annuity will provide an income for life it will not increase in value.

McPhail said: “At 3 per cent inflation, an investor’s income would halve in value over 22 years – the typical life expectancy for someone retiring at 65.”

Advisers are therefore recommending that those approaching retirement should consider unit-linked annuities which invest in the stock market to tackle inflation, but because your income depends on their performance, they are riskier than level annuities. The income you receive can fall if returns are poor, but there is also the chance for it to grow.

Burrows believes such annuities are attractive because the returns needed to beat a standard annuity are fairly undemanding.

He said: “There are risks, so the best solution might be to split the annuity pension between standard and investment-linked annuities. That way you are getting the best of both worlds.”

You could also consider one of many halfway-house options. Plans from Hartford, Metlife and most recently Fidelity are designed for savers who want more control over their money. Typically, such plans pay out a guaranteed income like an annuity, but allow most of your fund to remain invested until the age of 75.

Savers can withdraw money at any time. Sums left in the schemes can also be passed to family members when you die, although there may be an income tax and inheritance-tax charge.

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