When Pension Freedoms legislation was introduced in April 2015, it could have proven the death knell for the traditional annuity.

Professional Adviser confirms that the market shrank from £14 billion to just £3.4 billion a year “overnight” as consumers clamoured for new “flexible” options.

A regular, known income might not be as exciting as flexibility, but it can play a crucial role in your overall retirement plan. For this reason, annuities never really went away.

Now, after two years of rising rates and the pressures of market volatility making stable income look ever more attractive, annuities are in vogue again.

Keep reading for your look at why an annuity might be the right option for you, and how to fit a regular income for life into your retirement plans.

Annuity rates are on the rise making a guaranteed income for life more attractive than ever

The Bank of England base rate has soared over the last two years, from just 0.1% in December 2021 to 5.25% in December 2023. 

At the same time, annuities have risen by a massive 44%. Money Week recently confirmed that a 65-year-old with a £100,000 pension would now receive £7,149 a year from an annuity. This compares to the £4,953 they would have received just two years ago. 

FTAdviser, meanwhile, puts the figure at 54%. 

Either way, the impact on annuity take-up has been pronounced. Between July and September 2023, 18,623 retirees opted for an annuity, 10% higher than the previous quarter. Premiums in Q3 2023 amounted to £1.3 billion, the highest figure since Pension Freedoms legislation was introduced.

Economic uncertainty means that now might be the right time to consider an annuity

The last few years have seen UK inflation reach a 41-year high, as millions of households struggled with a cost of living crisis. 

Global events like the continuing conflict in Ukraine and the Israel-Hamas War have led to increased economic uncertainty and stock market volatility has tested investor patience.

In this climate, it’s arguably not surprising that retirees have returned to the tried and tested, traditional option of guaranteed retirement income. 

Here are a few factors to consider:

1. An annuity provides a guaranteed income for life 

You can use your defined contribution pension pot to buy an income for life and choose when and how often you receive these regular payments. You might opt for additional benefits, like a spouse’s pension or an income that rises to combat inflation.

These added benefits will cost more and so reduce the starting amount you receive. You’ll need to ask your provider for several quotes to decide on the right option for you. 

Once you have selected an option, this amount will continue to be paid until your death.

This regular income makes budgeting easy, especially for known and regular expenses like household bills but there could be some cons too.

2. There are pros and cons to an annuity so weigh these up carefully 

Retirement decisions can have far-reaching consequences so you’ll need to think carefully about the provider you choose. Failing to shop around could be extremely costly.

In fact, Canada Life recently looked at the difference between the best and worst annuity options on the market. A poor choice with a pension pot of just £150,000 could cost you £13,240 over a 20-year retirement, or £662 a year. 

Once you select your annuity option and it’s in payment, you’ll have an initial cooling-off period in which to cancel the annuity if you change your mind. After that point, there is no going back.

You’ll need to think about your outgoings now, and your potential outgoings in the future and be sure that your regular amount is sufficient. 

As we have seen in the last few years, inflation can quickly eat away at the buying power of your money. Think carefully about whether an escalating annuity (one that rises each year to combat inflation) is right for you. Note that your State Pension already does this via the triple lock.

It’s also important to consider that your spending in retirement won’t be regular. You’re likely to spend more in the early active years of your retirement before your spending eases off. Later in life, you might find care costs increase your expenditure again.

A regular income might not be best suited to deal with these fluctuations. For this reason, a mix of an annuity and flexible options might be the best choice. 

3. Consider fitting an annuity into your flexible plans for a “best of both” approach

As we have seen, an annuity makes budgeting easy and can cover regular known expenses. But not all of your retirement expenditures will be regular or known. 

This is especially true at the start of your retirement. If you have big plans for large, one-off expenses like world travel or house renovations, a flexible retirement option could be the best way to fund this.

What’s more, with an annuity running alongside, you’ll know that your regular expenses will continue to be covered.

Just remember that the onus for sensible budgeting with flexible pension options rests with you. You’ll need to ensure you keep track of your withdrawals and factor in the effects of inflation and stock movements on the income you draw down.

Get in touch

While there is no “one size fits all” pension approach, Boolers can help you to find the best option, or mix of options, to help you achieve your retirement goals. 

If you’d like help or you want to discuss the options available to you in greater detail, get in touch. Contact us with any questions you have and see how our team of dedicated professionals can help you.