In recent years, annuities have been making a comeback. According to the Association of British Insurers (ABI), annuity sales rose sharply in 2023, reflecting renewed demand from retirees seeking certainty in an uncertain economic climate.
But does that mean an annuity is the right choice for your retirement? With flexible options such as drawdown and other investment strategies available, deciding whether to buy an annuity is not straightforward. Here we explore the pros and cons to help you understand whether annuities could play a role in your retirement plan.
At a Glance
- Annuities are rising in popularity as more retirees seek guaranteed lifetime income.
- Buying an annuity means exchanging your pension savings for a secure, regular income.
- Different annuity types exist, from level annuities to inflation-linked options, each with trade-offs.
- Once purchased, an annuity is usually irreversible, so professional advice is crucial.
- The right choice depends on your lifestyle, health, and financial goals.
Why Annuities Are Back in Fashion
In a world of fluctuating markets, rising living costs and longer life expectancies, a level of certainty is attractive. An annuity provides a predictable income for life (or a fixed period). For many retirees, that may feel like having a salary again: predictable and steady.
With more people now spending 20–30 years in retirement, the risk of outliving savings is a growing concern. An annuity may help to manage that risk, by providing a predictable income stream usually life.
What Is an Annuity?
An annuity is a product you purchase from an insurance or pension provider, using some or all of your pension pot. In return, you can receive a regular income — either for life or for a specified term.
Essentially, you are trading investment potential for security. Your savings are generally no longer exposed to market ups and downs, but they also won’t benefit from future growth.
Many retirees choose to use annuities to help with essential expenses — such as bills, food, and housing costs — while using other income sources like drawdown or ISAs for discretionary spending (holidays, hobbies, and leisure).
Are Annuity Rates Fixed Forever?
If you choose a level annuity, your payments remain fixed. That means your spending power may decline over time if inflation rises.
Alternatively, an escalating annuity increases your income annually, either by a fixed percentage or in line with inflation. The trade-off is that the starting income is lower than with a level annuity, so you may need to live longer to benefit.
It’s also important to remember that annuity rates fluctuate with market conditions. Quotes are usually valid only for a short period, and once you lock in, you cannot usually change your annuity.
Can I Buy an Annuity With My Partner?
Yes. A joint-life annuity continues to pay an income to your spouse or civil partner after you die. Because the provider is covering two lives, the initial income is lower than with a single-life annuity.
With a single-life annuity, income normally stops at death unless you pay for add-ons, such as guarantee periods or death benefits. Again, these reduce your initial payout but may provide peace of mind for your family.
Do Health Conditions Affect Annuity Rates?
Yes — and sometimes in your favour. Enhanced annuities provide higher income for people with health conditions or lifestyle factors (such as smoking) that could reduce life expectancy.
Providers consider your age, health, and lifestyle when calculating annuity rates, so disclosing this information could significantly improve your income offer.
What If I Die Soon After Buying an Annuity?
One concern is that if you die early in retirement, the money used to buy your annuity is “lost.” To address this, many annuities allow you to add a guarantee period (for example, 10 years). If you die within that period, the income continues to your chosen beneficiary for the remaining years.
Some guarantee periods can extend to 30 or even 40 years, but each option affects the rate you’ll receive at the outset.
Additional Features and Costs
Like airline tickets with optional add-ons, annuities often come with extras — such as escalating payments, protection for beneficiaries, or guarantee periods. These features provide flexibility but also reduce your starting income.
It’s also worth noting that you are not obliged to buy an annuity from your existing pension provider. Shopping around for competitive rates is essential, and your adviser can compare offers across the market to ensure the best fit for your circumstances.
Even your postcode may affect the annuity rate offered, as providers use statistical assumptions about life expectancy in different regions.
Do I Have to Use My Pension to Buy an Annuity?
No. You can also use other assets such as savings or inheritance to buy a purchased life annuity, which is taxed differently to a pension annuity. Part of each payment is considered a return of your original capital, making it partially tax-free.
For example, you could take your 25% pension tax-free lump sum and use it to purchase a life annuity outside of your pension. This strategy may appeal if you want to diversify retirement income.
Are Annuities Right for Me?
Whether an annuity suits you depends on your personal circumstances and attitude to risk.
- If you prefer predictable and stable income, an annuity may help provide peace of mind.
- If you want flexibility and potential growth, pension drawdown may be more suitable.
- If you want to cover essentials with confidence but keep options open, a mix of annuity and drawdown could work well.
It’s also worth considering estate planning. While annuities can reduce the value of your estate for inheritance tax purposes, they also limit what you can pass on to beneficiaries.
Why Professional Advice Matters
Annuities can be complex, with significant long-term consequences. Once purchased, the decision is usually irreversible.
Speaking with a financial adviser ensures you:
- Understand all the types of annuities available.
- Compare rates across providers.
- Decide whether to add features like escalation or guarantee periods.
- Weigh annuities against other options such as drawdown or ISAs.
- Structure your retirement income in a tax-efficient way.
Final Thoughts
Annuities are back in the spotlight, offering a level of stability and reassurance for those who value predictable income in retirement. But they are not suitable for everyone. The right decision depends on your age, health, lifestyle goals, and financial situation.
At Blacktower, we help clients create tailored retirement plans that balance security with flexibility. Whether you are considering annuities, drawdown, or a combination, our advisers can guide you through the options and help you understand how they may fit into your overall retirement strategy.
Get in touch today to explore whether an annuity could be the right addition to your retirement strategy.
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This communication is for informational purposes only based on our understanding of current legislation and practices which are subject to change and are not intended to constitute, and should not be construed as, tax advice, investment advice, investment recommendations or investment research. Investing involves risk. The value of investments can go down as well as up, and you may not get back the amount originally invested. Past performance is not a reliable indicator of future results. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
Source: Association of British Insurers (ABI), 2023.
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This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
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