Why Annuities are still worth considering


Four years ago, the biggest shake-up to the pensions industry in a generation occurred. And it’s had a huge impact on the way pensioners access their lifetime savings and retirement lifestyles. Whilst Annuities have somewhat fallen out of favour, they still play an important role in accessing pensions.

In the past, purchasing an Annuity was often the only way for pension savers to access their pension. That changed in 2015 and pensioners have eagerly embraced the new freedoms on offer. Data collected by the Financial Conduct Authority (FCA) found that in 2018/19:

  • 73,977 retirees purchased an Annuity, accounting for just 11% of the market
  • In contrast, 190,971 (30%) used Flexi-Access Drawdown, allowing them to take a flexible income
  • Over half (55%) fully withdrew their pension, though it’s important to note that a large portion of this is made up of small pensions, suggesting pension holders are using other pensions to create an income long term

So, if fewer pensioners are choosing an Annuity, are they still worth considering? The short answer is ‘yes’.

Whilst trends give a picture of the pension market as a whole, it doesn’t mean these trends are right for you. How you access your pension can have a big impact on your retirement. So, it’s worth taking the time to explore all the options, including Annuities.

What is an Annuity?

Let’s clear up exactly what an Annuity is first. It’s a product you purchase with your pension savings. In return for this lump sum, an annuity provider will provide you with a regular income for the rest of your life. The rate, and therefore income, you receive from a provider depends on a variety of factors. This will include personal factors such as your age, health, and lifestyle, as well as external ones.

So, why should you still consider an Annuity? Here are five reasons:

1. It provides a guaranteed income

An Annuity can provide security in retirement. It delivers a regular income that can be relied on. Without a salary coming in, this can be valuable. You won’t have to worry about how you’ll cover bills or when your bank account will next be topped up. If you’re someone who prefers to plan and have financial certainty, this is useful. An alternative to an Annuity may not provide a guaranteed income, which may lead to uncertainty.

2. The income lasts a lifetime

One of the challenges of planning retirement finances is not knowing how long your pension needs to last for. It can mean you run the risk of spending too much too soon, or, alternatively, living too frugally. An Annuity removes some of this worry, as the income will be paid until you die. Of course, the longer you live, the more beneficial this feature of an Annuity is.

3. You can link Annuity income to inflation

How much income you need in retirement now may be very different from what’s needed in ten years’ time. Rising inflation slowly reduces your spending power if income remains static. It is possible to choose an Annuity that provides an income that rises in line with inflation, preserving your spending power. Small annual increases in the cost of living can seem like they’ll have little impact, but over an extended period it can add up. This usually means the starting level of income is lower but does increase annually.

4. You don’t need to take responsibility for investments

Flexi-Access Drawdown has become a popular way to take a flexible income in retirement. However, this does come with responsibilities. The pension will usually remain invested, and retirees will need to take some responsibility for either choosing funds or investments, as well as managing investment volatility when making withdrawals. With an Annuity, you are guaranteed a regular income, taking this responsibility away.

5. It can provide for other family members

This doesn’t apply to all Annuities, but you can choose a product that will offer your loved ones financial security too. A joint Annuity, for example, can give you peace of mind that your partner will continue to receive an income even if you pass away. This may affect the rate you’re offered and in some circumstances, it’s more appropriate to purchase separate Annuity products, so be sure to weigh up all options before proceeding.

Remember: You don’t have to use your entire pension to purchase an Annuity

When looking at your retirement options, you may decide that the benefits of an Annuity make it appealing. However, you’d still like some degree of flexibility. If this is the case, remember you don’t have to use all of a pension to purchase an Annuity.

If you choose, you could use a portion of your pension to purchase an Annuity, leaving the rest invested to access flexibly. You can also still take your tax-free lump sum, usually 25%, before purchasing an Annuity too. As a result, an Annuity can be used to create a base income that will cover your essential expenditure, whilst alternatives can be used to suit changing lifestyle needs.

It’s important to think carefully before setting up an Annuity. It’s not a decision that can be reversed if you change your mind.

It can be difficult to weigh up which options are best for you, especially if you’re considering a hybrid approach. If you’d like to discuss your pensions and options for accessing them at retirement, please get in touch.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.