Pension annuities – delivering certainty in uncertain times

What’s behind the annuity revival?

Before we get into what’s going on in the market, it’s firstly important to recognise that, while the pension freedoms gave people more choice over how they could use their pension savings – they also created new risks for people too.

For example, if you choose not to buy an annuity and want to access your pension savings flexibly, the money in your pension pot will generally remain invested. This means you’ll still be exposed to the inevitable ups and downs of the market. And, during particularly turbulent times, you might see significant swings on the value of your pension savings.

Likewise, as we’ve covered before, an annuity offers a guarantee that you’ll be able to enjoy an income for the rest of your life – no matter what. If you decide not to go down that route, then you’ll need to make sure your pension savings last for as long as you do. And, with one in four men aged 65 potentially living until 92, and 94 for women, that could be a very long time. 

Taking all this on board, we believe there are two main forces that have brought annuities back in from the cold.

People yearn for more certainty

First of all, both the cost of living crisis and spiralling inflation has stretched budgets and tightened belts across the country. In these challenging times, it’s perhaps understandable that people are putting more value on having certainty over their finances. 

In fact, through our latest Retirement Voice study, which surveyed almost 6,000 people across the UK, we found that 78% of people believe ‘certainty of income’ is a priority when it comes to their retirement needs – while 68% want enough guaranteed income to cover their essentials.

Unlike the other retirement income options created by the pension freedoms, only an annuity can give you this peace of mind.

You can currently get more for your money

Secondly, annuity rates have soared to decade-high levels – with an increase of around 31% over the last year. This is being driven by the much-publicised rises in interest rates, but it basically means that the income an annuity would pay you in return for your pension savings could now be almost a third more than it was at this time last year.  

But what does that mean in monetary terms? Well, say you’re a 60-year-old man with £100,000 in your pension pot. This time last year, you could have bought a single-life, level annuity that would pay you something in the region £4,522 each year (a ‘single-life, level annuity’ translates as meaning your payments will stay the same each year and they won’t pass on to anyone else when you die).

Today, that £100,000 could buy the same type of annuity, but it would give you a guaranteed yearly income of around £5,934. A much more attractive figure.

This spike in value has understandably thrown annuities back into serious contention for many pension savers.

Think carefully before doing anything

As always, how you choose to access your pension savings is a big decision. And, just because the annuity market is buoyant right now, it doesn’t mean an annuity is right for you.

So, if you’ve not decided how you want to access your pension savings yet, it’s important to do your homework and weigh up all your options. If you do decide you’d like to buy an annuity, it’s equally important to shop around – because you could end up with a better deal.

If you’re still unsure or need a bit of extra help, we’d recommend seeking guidance or talking to a professional financial adviser.

The information here is based on our understanding in May 2023 and shouldn’t be taken as financial advice.

Rates provided by AMS (Retirement Systems) based on publicly available information.

A pension is an investment, the value can go down as well as up and you could get back less than you paid in.