Annuities fall in popularity, but could they still be the right choice?


Annuities have undoubtedly fallen out of favour among new retirees, as 75% fewer people are choosing to buy one when they retire, since 2015’s Pension Freedoms reform. (Source: Association of British Insurers ABI)

But is that truly because the new options are better?

Not according to reviews from the Financial Conduct Authority (FCA), who believe this drop could be due to the marketing of pension products, rather than individual suitability.

What do Annuities offer?

Naturally, Annuities are more suitable for some people than others, and whether you decide to buy one will depend on your circumstances, goals and needs.

Annuities offer:

  • A guaranteed income for the rest of your life
  • Minimal risk for your retirement income
  • The ability to make a single decision and be financially secure for the rest of your life

If you are looking for a safe and non-negotiable retirement income, then an Annuity might be the right pension option for you.

However, an Annuity does not offer:

  • The opportunity to leave pension benefits to loved ones
  • Any room for growth
  • The ability to take lump sums for emergencies or large purchases

What about the other options?

When accessing your personal pension, if you want to buy an Annuity, and have decided how much tax-free cash to take, you then have the option to:

  • Put some of your pension into Flexi-Access Drawdown and buy an Annuity with the rest
  • Buy an Annuity with part of your fund and leave the rest to grow without incurring tax
  • Use the full fund to purchase an Annuity

Types of Annuity

Now that you know how you can use your fund to purchase an Annuity, you will need to know what options are available to you.

Lifetime Annuities

Possibly the most common type of Annuity. This pays a guaranteed, potentially inflation-proofed income every year until you pass away. These plans are available for both individuals and couples.

Enhanced Annuity

Offering the same benefits as a Lifetime Annuity, these Annuities are designed for individuals who have long-term serious illnesses, or who lead unhealthy lifestyles. These Annuities offer a higher annual income, as they assume that they will be paying out for less time, due to a reduced life expectancy.

It can be easy to think that an Enhanced Annuity is not for you, but 60 to 70% of people could be eligible for an enhanced Annuity and do not realise it. With some plans offering up to 50% additional income, it is worth investigating. (Source: Money Facts)

Investment-linked Annuities

This Annuity option allows the provider to invest the money you use to purchase your income. The risks associated with investments mean that your income can rise or fall, and your income level might not be guaranteed.

Temporary Annuity

If you plan to retain some of your pension fund for later, you can choose to purchase an Annuity which provides a guaranteed income, but for a set period, rather than for life.

How can you find the best Annuity for you?

We’ve written several guides on finding the right Annuity and you can see our ‘golden rules’ for buying an Annuity here.

Aside from these tips, you should:

  • Shop around to find the best rate on the market and weigh up the different levels of income available
  • Ask the right questions when talking to an Annuity adviser
  • Talk to a professional; before making any decisions surrounding your pension and retirement income, it is important to double check that you are on the right track.

At Investment Sense, we can make sure that your retirement choices are most suited to your circumstances and will help you to meet your goals. If they aren’t, we can offer advice and solutions to put you back on track and streamline your financial plan.

To discuss your retirement income options, get in touch with Sarah or Bev on 0115 933 8433.