November 2022

Annuities have reached a 14-year high, so could one be the right option for you?


Thanks to the introduction of Pension Freedoms in 2015, you now have lots of options for how to use your defined contribution (DC) pension savings when you reach retirement.

One of those options is to buy an annuity using some of your pension. In recent years, annuities have been less attractive options as rates have been quite low, meaning you wouldn’t get as much for your money.

But this year, annuity rates have soared to a 14-year high, making them an interesting proposition for those looking for a guaranteed annual income in retirement.

So, what exactly is an annuity, and could one be the right choice for you? Read on to learn more.

An annuity offers a guaranteed annual income

When you buy an annuity, you pay a lump sum from your pension in exchange for a guaranteed annual income, either for the rest of your life, or for the term of the annuity. Some annuities are inflation-linked, meaning the annual income you receive will rise in line with inflation each year.

Some annuities offer higher annual incomes if you have a serious illness or meet other eligibility criteria.

Annuity rates have soared in 2022

Annuity rates are linked to interest rates. When interest rates are low, as they had been for some time in the UK, annuity rates also drop.

But since interest rates have risen sharply over the course of 2022, so have annuity rates. That’s why it might now be something to consider if you are approaching retirement and want to maximise the income you receive from your existing pension savings.

To give some context, MoneyAge reports that a benchmark £100,000 annuity at age 65 would secure a guaranteed income of £6,873 a year if bought in October 2022. By contrast, the same annuity would only have paid £4,521 a year if bought at the beginning of 2022.

 3 benefits of buying an annuity

1. An annuity guarantees you an annual income

Unlike many other retirement options, an annuity means that you have an annual income that is guaranteed until the end of the term, which can even be until the end of your life.

That means you don’t need to worry about possibly running out of money, like you could if using drawdown, or about market volatility reducing the value of any funds that remain invested in your pension or elsewhere.

2. You can buy annuities in stages to benefit from rate increases

Annuity rates are high at the moment, but there is always a chance they could go higher after you have bought your annuity. If you think this might happen, you could buy annuities in stages so that you still benefit from potential future rate rises in the later years of your retirement.

3. An annuity could provide an income for your partner

Even though it can be difficult to think about, it’s important to understand what might happen to your finances when you pass away. If you die before the end of the guaranteed period of your annuity, payments (or a portion of them) could be paid to your partner if you take out a joint annuity. This peace of mind can be very reassuring.

 3 drawbacks of buying an annuity

1. Less flexibility than drawdown 

Once you’ve bought an annuity, you can’t change your mind. While you could buy additional annuities to secure higher income, you can’t undo any that you have already bought. If you were using drawdown funds though, you can increase or decrease the amount you take as income at your leisure so long as you have funds remaining.  

2. Your beneficiaries cannot inherit an annuity

The annual income from an annuity ends when you pass away, unless you have bought a joint annuity, in which case your partner could continue to receive income from it. This means that any beneficiaries in your will won’t receive any money from the annuity.

Meanwhile, your beneficiaries will usually be able to inherit your pension. And, as pensions typically fall outside the value of your estate, you’ll be able to pass this value on without having to worry about Inheritance Tax (IHT).

3. Annuities can sometimes have high management fees

Before you buy an annuity, you should check what fees will be payable to make sure you still receive the income you expect. Some providers may charge a fixed annual fee, while others may charge a percentage of your pension fund. Either way, if the fees are high, it can mean that you are not getting quite such a good deal as you thought you were.

Get in touch

If you’d like to find out more about whether an annuity might be the right choice for you, we’re here to help. Email or call 020 8946 8186.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, 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. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.