Annuities: 6 important pros and cons to consider if you’re retiring now

If you’re on the road to retirement, perhaps planning to reach this milestone within the next 12 months, you might be feeling a little nervous about your prospects.

While it’s likely that you have spent many years saving and investing with a view of retiring comfortably, world events, the cost of living crisis, and stock market volatility might dampen your spirit. Although there’s nothing to panic about – and if you are worried, speaking to your adviser might help – it’s safe to say that retirees may be facing a different landscape today than those in previous generations.

If you’re searching for ways to achieve financial stability in retirement, you might have considered buying an annuity. An annuity provides a fixed income that can be purchased in exchange for all or a portion of your pension pot(s), savings, and investments.

You may even have read in the news that annuity sales went up by as much as 39% in the 2023/24 tax year, according to Money Week, demonstrating just how popular this fixed form of retirement income is.

So: is an annuity right for you, and could buying one improve your quality of life in retirement? Here are three pros and three cons to consider.

 

Pro 1: You can gain a guaranteed fixed income for life

Some annuities, known as “lifetime annuities”, pay out a regular income for the rest of your life. In some cases, you could live into your 100s while still receiving exactly the same payments as you did in your 60s and 70s.

While these annuities are slightly more expensive than fixed-term agreements, they could give you the ultimate peace of mind that your money won’t run out as you age.

 

Pro 2: World events and stock market volatility won’t affect your income

If you choose to draw a flexible income from your workplace pension or self-invested personal pension (SIPP), world events could push the value of your pot up or down, affecting how much you can withdraw.

Whereas, using some or all of these funds (and any other invested wealth, such as your Stocks and Shares ISAs) to purchase an annuity would remove any uncertainty around market volatility and how this may affect your retirement.

 

Pro 3: You can make flexible choices to better your future

While annuities are, at their core, an inflexible product, there are several options available for those looking to benefit from a guaranteed income.

For example, you could:

• Explore lifetime annuities versus fixed-term options
• Decide how much of your pension wealth and other savings to spend on an annuity, perhaps opting for a combined approach
• Look at inflation-linked annuities that rise in line with inflation, so you can keep up with rising costs over the years
• Consider a joint annuity with your spouse or civil partner
• Talk to your financial adviser about annuity options that may suit your needs in retirement.

Each of these options allows you to tailor your wealth needs in retirement, even within a structured income option like an annuity.

 

Con 1: Lower interest rates could mean annuities are a less attractive option

In October 2024, the Office for National Statistics (ONS) reported that UK inflation has dropped to 1.7%, down from 2.2% in August.

A far cry from the double-digit inflation we experienced during the height of the pandemic, this decline may prompt the Bank of England (BoE), along with banks and building societies, to drop their interest rates. As of 16 October 2024, the BoE base rate is 5%.

Annuity rates are strongly linked to interest rates. The higher the annuity rate at the point of purchase, the larger amount you might receive as part of your guaranteed income for life or a fixed term.

So, with interest rates likely to drop at the end of 2024 and the start of 2025, annuity rates might not be as attractive as they were when interest rates reached their peak.

 

Con 2: You could lose out on potential future gains

While stability and peace of mind might be your priority, be aware that when you purchase an annuity you may not regain the full value of the capital you spent.

For instance, if you bought an annuity for £500,000, you could be missing out on a potential 5% annual return on this capital, especially if the global stock market continues its long-term upward trajectory.

Or, if you don’t live as long as you’d hoped and payments are not transferrable to your spouse or civil partner, these funds could essentially be lost after your death.

 

Con 3: Your beneficiaries might receive a smaller inheritance

Some joint annuities enable your spouse or civil partner to continue receiving your payments, even if you pass away. This said, using a large chunk of your retirement savings to purchase an annuity could leave your children and grandchildren with less after you’re gone.

For instance, if the unthinkable happened and you passed away just 10 years into retirement, your lifetime annuity payments may lapse, meaning your family are unlikely to reap the rewards of these long-term payments.

On the other hand, taking your pension income as normal could mean that if you passed away, your beneficiaries could inherit your remaining wealth and use it to progress towards their own goals.

 

Get in touch to discuss your retirement options with a financial adviser

We understand that the vast array of retirement options in front of you might feel overwhelming. Working with an adviser could help to turn this overwhelm into a financial plan tailored specifically towards your goals.

Email info@chancellorfinancial.co.uk, or call 01204 526 846 to speak to an adviser.

If you’re already a client here at Chancellor, contact your personal financial adviser to discuss any of the content you’ve read in this article.

 

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. 

Workplace pensions are regulated by The Pension Regulator.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.