As annuities regain popularity in the wake of recent economic shifts, individuals approaching retirement face new opportunities to secure their financial future. With the resurgence of interest in annuities, choosing the right one has become increasingly important. Various platforms, including the government's MoneyHelper website, Annuity Ready by Legal & General, and investment platform Hargreaves Lansdown, now offer tools to compare annuity rates and obtain quotes. This development is crucial for those aged 55 and above—soon to be 57 from April 2028—who are looking to convert their pension savings into a steady income stream.
The perception of annuities as a poor investment option had previously led to a significant decline in demand, especially after the introduction of "pension freedoms" a decade ago, which removed the obligation to purchase an annuity. However, higher interest rates in recent years have made annuities a more attractive choice, providing better value for money. Despite these improvements, industry experts warn that failing to shop around can result in substantial financial losses for pension savers.
“Failing to shop around when buying an annuity can easily lose pension savers thousands of pounds,” – Just
Annuities provide retirees with a dependable income, eliminating worries about outliving their savings. This sense of stability is further enhanced by options such as "guarantee periods," which ensure that income continues to be paid out for a specified time—often five or ten years—even if the annuity holder passes away shortly after purchase. Additionally, retirees can choose between level annuities, offering a fixed annual income, and escalating annuities, which increase payments annually and can be particularly beneficial in times of high inflation.
“The stability of a guaranteed income gives retirees peace of mind that their money won’t run out even if they live past 100,” – Lorna Shah at Legal & General
“It takes the guesswork out of budgeting and lets people focus on enjoying retirement.” – Lorna Shah at Legal & General
Escalating annuities allow retirees to select between a predetermined annual increase rate—commonly 3% or 5%—or an index-linked rate that adjusts in line with inflation. For instance, if a retiree opts for an income linked to the retail prices index (RPI) with a five-year guarantee, initial annual payments might start from £4,786 or £6,959. A 65-year-old retiree with a £100,000 pension pot could receive £7,287 annually from a single life level annuity without a guarantee period. Alternatively, selecting a joint life level annuity where the surviving partner receives 50%, but without a guarantee period, results in annual incomes of £6,692 for a 65-year-old and £8,315 for a 75-year-old. Adjusting this option to include a 3% annual increase changes these amounts to £4,769 and £6,533, respectively.
To maximize retirement income, comparing deals across the market is crucial. Switching to the best available deal could increase an individual's retirement income by as much as 20%. This potential boost in financial security has contributed to rising annuity sales. The recent changes to inheritance tax on pensions announced in October's budget are expected to encourage even more people to consider annuities as part of their retirement planning.
“Not all providers will deal directly with you, so you may wish to consider professional financial advice or using an annuity broker,” – MoneyHelper