Pension annuities – delivering certainty in uncertain times

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MoneyPlus Features Team

May 15, 2023

4 mins read

If you’re approaching retirement, you’re probably thinking about how you’d like to access your pension savings. There will be lots of options available to you – but, as many households struggle with the cost of living crisis, the benefit of having a guaranteed, regular income may be increasingly difficult to ignore. 

Is now the perfect time to for pension annuities to reveal their true value?

What is an annuity?

An annuity is a retirement income product that lets you turn your pension savings into a regular income. And, believe it or not, they’ve been around since Roman times.

While things have obviously evolved over the last two thousand years or so, the basic concept remains pretty much the same. In the world of today, that would see you hand over some or all of your pension savings to an insurance company and, in return, they’d agree to pay you a yearly income for the rest of your life.

This income is guaranteed. So, no matter what happens in the world, you can sleep easy knowing that your payments will continue on whatever terms you’ve agreed up front.

There are many different types of annuity, along with different features you can ‘bolt on’ to make things more suited to your needs. For instance, you can choose to add yearly increases to your payments, or make sure some of your income is passed on to your spouse when you die.

But, whatever you decide to do, it’s important to understand that annuities are non-refundable. So once your annuity payments begin, you can’t go back and change your mind later.

Why annuities fell out of favour

For a long time, annuities were really the only show in town for savers who wanted to turn their pension savings into an income. But, while they could offer long-term security and protection from market volatility, they were often seen to deliver poor value for money.

Things fundamentally changed back in 2015 when the government introduced new ‘pension freedoms’ legislation. From this point, people were able to enjoy a lot more choice over how they could access their pension savings. 

And while annuities have never left the table as an option, people could now choose to dip into their pension pot whenever they liked – or even take some or all of their savings as a cash lump sum.  

Having this extra control and flexibility has proven to be immensely popular – and, up until recently, had pushed new annuity purchases to the fringes of mainstream retirement planning.

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.

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