Should I buy an annuity with my pension?

Category: Retirement

If you’re planning for retirement, you may be considering buying an annuity.

Annuities provide a guaranteed income for life, which can be a valuable source of security in retirement. In recent years, annuity rates have been on the rise, meaning you can now get a higher income from an annuity than you could in the past.

What are annuities?

An annuity is a financial product that provides a guaranteed income for life. When you buy an annuity, you give your money to an insurance company, and in return, they promise to pay you a monthly income for as long as you live. There are different types of annuities, with different features and benefits.

Why are annuity rates rising?

Current rates are better than they have been in a long time due to high inflation. Although high inflation isn’t ideal, it can lead to higher annuity rates, which are influenced by gilt yields and interest rates. Recently, the Bank of England announced that consumer price index inflation (CPI) decreased from 10.1% to 8.7% in April, but this was still higher than their forecast of 8.4%. This means that interest rates are likely to continue to rise. In fact, Government Bond yields have already risen to levels seen after last year’s mini-budget.

Some annuity providers have already increased how much they will pay out. Taking the top annuity rates available as of 26 May, a 65-year-old could purchase a single-life, level, five-year guaranteed annuity paying an annual income of £6,667 for £100,000, according to This is 32% more than what could have been bought at the end of 2021.

What are the advantages of buying an Annuity?

  • Guaranteed Income: By purchasing an annuity, you secure a fixed income for life or a specified period, ensuring financial stability during retirement. This can be particularly reassuring if you are risk-averse and prefer a predictable income stream.
  • Protection Against Market Volatility: Annuities shield you from market fluctuations, providing a reliable income regardless of how the financial markets perform. This stability can be especially valuable during economic downturns or periods of uncertainty.
  • Simplicity and Peace of Mind: Annuities simplify retirement planning by eliminating the need to make investment decisions or monitor your portfolio’s performance. This hands-off approach can bring peace of mind, as you don’t need to worry about managing investments or market conditions.
  • Longevity Protection: Annuities can include provisions for a spouse or dependents, ensuring they continue to receive income even after your death. This feature provides protection against the risk of outliving your savings and offers peace of mind for the future of your loved ones.

What are the disadvantages of buying an Annuity?

  • Lack of Flexibility: Once you purchase an annuity, your funds are committed, and you lose the ability to access the lump sum or make changes to the income stream. This lack of flexibility may not suit individuals who desire control over their retirement funds or have specific financial needs.
  • Potentially Lower Income for Some: Annuity rates, while currently on the rise, may not be as high as anticipated for everyone. Factors such as age, health, and market conditions can impact the income you receive from an annuity. It is essential to compare rates and options before making a decision.
  • No Potential for Investment Growth: Unlike drawdown, where your pension funds remain invested and have the potential for growth, annuities do not offer investment growth opportunities. If you are comfortable with investment risk or wish to pass on wealth to future generations, annuities may not be the ideal choice.
  • Inflation Risk: Annuities may not fully protect against the erosive effects of inflation. If the cost of living increases significantly over time, the fixed income provided by an annuity may lose purchasing power. This is a critical factor to consider, especially for long retirement periods.

The recent increase in annuity rates has made annuities a more attractive option. However, it is essential to weigh the pros and cons before deciding whether to purchase an annuity with your pension. Consider your financial goals, risk tolerance, and personal circumstances when planning for retirement income. Seek guidance from a financial planner to make the best decision.

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