Five Reasons to Buy a Pension Annuity

After a lifetime accumulating pension savings, you reach the point when those savings must provide a regular income for your retirement. The options today are broader than ever — drawdown, lump sums, or a mix of approaches — but the most traditional route, the annuity, has firmly returned to favour. Here’s why.

Consider your pension fund, built up over a working lifetime. On retirement, you could simply draw a regular amount directly from the fund. The risk with that approach is that if your withdrawals outpace investment growth, your fund is gradually eroded and could eventually run out.

This, in a nutshell, is why annuities exist. An annuity is a kind of insurance policy against the two key risks of retirement: living longer than average, and not generating sufficient investment returns to sustain your income. You use your pension fund to buy a secure income from an insurance company for the rest of your life — guaranteed, whatever happens to markets and however long you live.

Annuity rates fell for the best part of two decades as global interest rates declined, which understandably dented their popularity. That picture has now reversed: rates have recovered strongly in recent years as interest rates and gilt yields have risen, and industry figures show annuity sales at record levels as more retirees look to lock in a guaranteed income. Against that backdrop, here are five genuine reasons an annuity could be the right choice for some or all of your pension.

1. A secure base

By using a proportion of your pension fund to buy an annuity that covers your essential living costs, you can then make regular or ad hoc withdrawals from your remaining pension over time to fund additional extras. This strikes a sensible balance between security and flexibility — your basics are guaranteed for life, while the rest of your fund stays invested and available.

2. A gradual approach

Rather than buying one large annuity, you can purchase a series of smaller annuities over time as part of a phased retirement, taking your tax-free cash entitlement with each purchase to help fund that year’s living costs. The remaining pension fund stays invested for potential growth until you need it for the next stage. Because annuity rates rise as you get older, later purchases can secure a higher level of income than earlier ones — and your guaranteed income builds gradually until the whole fund is converted.

3. Impaired health

If you have a severe or terminal health condition, an annuity may not represent the best value for your family, since you would expect to receive it for a shorter time than average — other options may suit you better, and this is worth discussing with a specialist. However, if you have one or more of a wide range of common long-term health conditions or lifestyle factors, you could be offered a considerably higher annuity than the standard rate. These are known as Enhanced Annuities, and depending on your circumstances the increase can be substantial — in some cases up to 60% more income than a standard rate. Qualifying factors include smoking, above-average alcohol consumption, heart disease, stroke, cancer, diabetes, raised cholesterol, high blood pressure and being overweight, among many others. Complete our free questionnaire to find out how much higher a rate you might secure →

4. Cash investor

Whether you take a regular or single withdrawal from your pension, you will still need to generate an income from that money. If your alternative is to hold withdrawn funds in a savings account, a standard or especially an Enhanced Annuity can provide a much higher and more stable long-term return than cash deposit rates are ever likely to offer — and unlike a savings pot, the annuity income cannot run out, however long you live.

5. Simplicity

An annuity, or a series of annuities, is straightforward to arrange, needs no ongoing management, and avoids ongoing investment risk and charges. Do you want to be making complex decisions about funding your living costs in your 80s or 90s, or would you prefer the certainty of a regular, guaranteed income that simply arrives? For many people approaching or already in retirement, that simplicity is worth a great deal on its own — alongside whatever rate is on offer.

Is an annuity right for you?

An annuity will not suit everyone, and it is not the only option — many people use a mix of an annuity for security and flexi-access drawdown for flexibility. Free, impartial guidance on all your retirement options is available from MoneyHelper. What matters most, whichever route suits you, is comparing the whole of the market rather than accepting the first rate you are offered — since once an annuity is set up, the rate is locked in permanently.

This article is for general information only and does not constitute advice. Enhanced annuity rates depend on your individual health, lifestyle and circumstances, and not everyone will qualify. An annuity cannot normally be changed or cancelled once set up, and will not be right for everyone. Annuity rates can go down as well as up. We will not provide advice or recommendations as part of our non-advised annuity comparison service; the decision is always yours. Free impartial guidance is available from MoneyHelper. Retirement Professionals Ltd is an appointed representative of pi financial ltd, authorised and regulated by the Financial Conduct Authority. FCA number 622943.