As you approach retirement, the financial decisions you make will have a long-term effect on your income and financial security in the years to come.

For example, when you retire, you’ll need to think about how you’d like to take income from the pension savings you’ve built up. One option is an annuity – a financial product that promises a guaranteed regular income for the rest of your life, or a specified term.

Before the introduction of the so-called ‘pension freedoms’ in 2015, pension tax rules encouraged retirees to purchase an annuity with their pension savings. But falling annuity rates, coupled with the arrival of more flexible options to take income from a pension, saw their popularity decline. Now, thanks to higher interest rates and inflation, annuity rates are rising again and they’re proving increasingly popular.

So, is an annuity something you should consider? We take a look at the benefits and drawbacks to help you build up a clearer picture.

An annuity can provide you with a guaranteed income for life, ensuring you won't outlive your savings

When might an annuity be a good investment?

If you value financial security above the potential for higher investment returns

One of the most compelling reasons for choosing an annuity over other income options (like pension drawdown) is the promise of long-term financial security. An annuity can provide you with a guaranteed income for life, ensuring you won’t outlive your savings. Your fund won’t benefit from investment growth, but it won’t be affected by falling markets either.

If you value stability and predictability

Annuities offer a stable and predictable income throughout your retirement. You’ll know exactly how much money you’ll receive each month, making it easier to budget and plan. Unlike pension drawdown, it’s not reliant on the unpredictability of the financial markets and will never run out, no matter what age you live to.

If you want to protect yourself against a rapid rise in inflation

To combat the eroding effects of inflation, you can opt for an ‘increasing annuity.’ This annuity type can either be ‘index-linked’, adjusting with inflation, or have a fixed annual percentage increase. While these options may initially cost more or offer lower initial income, they can protect your purchasing power throughout retirement.

If you want to ensure your partner receives an income after your death

A common misconception with annuities is that the income ceases when the person who holds the annuity dies. However, there are ways to ensure your loved ones continue to receive an income. For example, you can choose a ‘joint-life’ policy, extending the annuity to your partner. Alternatively, a Value Protected Annuity (VPA) can guarantee payments to a named beneficiary after your passing.

When might an annuity not be a good investment?

If you’re worried you might not get back what you paid

Annuities are, at their core, insurance policies. Consequently, they have both winners and losers. If you pass away sooner than expected, and haven’t incorporated protections like a VPA or a joint annuity, your investment may not benefit you or your loved ones to its full potential. In such cases, you may receive less income than the amount paid for the annuity.

If you are keen to benefit from financial market upturns

Annuity rates fluctuate with the market, but when you purchase your annuity they will be fixed for the policy term. That means if you buy an annuity when rates are low, you may miss out on potentially higher income in the future. To mitigate this risk, some individuals choose fixed-term annuities (typically 5-10 years), hoping for better rates down the line. However, once you commit to an annuity, you’re locked in for the agreed term.

If you don’t want to commit for the long-term

Once you’ve purchased an annuity, you won’t have the option to switch to a more lucrative annuity or withdraw a lump sum until the end of the policy. To address this limitation, some retirees allocate a portion of their pension savings to an annuity while keeping the rest invested. This strategy combines a stable income with investment flexibility. Many people choose to balance an annuity with other financial instruments to maintain some financial freedom.

Is an annuity a good investment for you?

Deciding whether annuities are a suitable investment for your retirement requires careful consideration of your unique circumstances, your attitude and capacity for loss, and your financial goals. They offer financial security, stability, and protection against inflation – but they may not give you the highest returns.

It’s vital to consult with a financial planner who can help you identify what you want from retirement, navigate the complexities of the retirement income market, and tailor your retirement plan accordingly.

Amber River retirement planning

If you’re nearing retirement and want guidance on generating income from your pension savings, an Amber River independent financial adviser will provide you with options based on your specific situation and retirement objectives. With their support, you can confidently make informed decisions about securing your financial future.

Get in touch

To speak to us about your investment goals, or to arrange an appointment, call 0800 915 0000, or alternatively use our contact form here.