Is now a good time to buy an annuity?

Securing a guaranteed income via an annuity remains an important option for people to consider as part of their retirement plans. Recently they have gained in popularity thanks to rising interest rates - is now the right time to buy an annuity?

| 9 min read

There are two main options at retirement for those with ‘defined contribution’ pension plans such as personal pensions and SIPPs. Continue investing and take out money from your pot as and when needed – known as drawdown – or buy an annuity.

What is an annuity and how does it work?

An annuity is an insurance product that guarantees a regular income, usually for life, in exchange for your pension pot or part of it. They come in various forms so they can be tailored to suit someone’s circumstances and objectives.

You can, for instance, opt for payments to increase in line with inflation, or you can choose to have a reduced income paid to a surviving spouse or civil partner on your death. Both of these will come at a cost of a lower starting income. There are also ‘fixed term’ annuities that provide you with a guaranteed income for a set number of years with an option to receive money back at the end of the term.

Drawdown vs annuity: which is better for you?

Hourglass on calendar representing pension drawdown

Deciding between an annuity and pension drawdown is a complex issue, and any decision must be carefully considered. Once you have bought an annuity you can’t reverse the decision and, in the case of most products, you lose access to all your capital.

Meanwhile, drawdown offers extra flexibility and the potential for better returns and more income, but it is also more risky. Keeping your pension fund invested means the value can fluctuate according to what markets are doing. You also need to be careful about how much you take out and when to ensure you leave enough for future needs.

If you rely on drawdown to fund your retirement you risk running out of money if you live longer than expected, or a market fall hits the value of your pension pot. Follow the link to calculate how long your pension drawdown could last.

An annuity comes with the security that you won’t outlive it. Having at least some of your income guaranteed either with an annuity, or a protected income from another source such as a defined benefit pension scheme, can help ensure you can meet bills and basic needs for the rest of your life. This peace of mind means annuities can play a very useful role in retirement planning.

A perennial bugbear concerning annuities is the meagre income provided for the cash stumped up. However, this was largely a function of very low interest rates for much of the past decade, as well as increasing longevity. However, today’s market is looking much more attractive. Higher interest rates, which have been a real headache for mortgage holders and other borrowers, are a boost for those wishing to secure income from an annuity. It’s a potential silver lining for some at a time when many are feeling the squeeze from the rising cost of living.

As a result annuities have surged in popularity lately, with sales reaching their highest volume by value since 2015. This was when pensions freedoms were introduced, which gave people more flexibility over how to access their retirement savings and drawdown became much more common.

Are annuity rates going up?

Annuity rates are largely based on gilt (UK government bond) yields, which have risen sharply due to the series of interest rate increases we’ve seen over the last year or two as the Bank of England (BoE) has attempted to quell surging price rises.

The battle with inflation may not quite be over. While interest rates have stopped rising, cuts may be slow to come through. We could therefore see these higher annuity rates for some time, though they could fall back if inflation and interest rates subside more than anticipated. s

In any case, if you’re retiring soon, you might get an attractive quote with rates higher than they have been for much of the past decade, and it means those who decide to annuitise today could be hundreds or even thousands of pounds better off a year than had they done so at the start of 2022.

How much will a £100k annuity pay in the UK?

Here are some current indicative annual income rates for a 65-year old using £100,000 to buy an annuity:

£100,000LevelInflation Linked (RPI)
Sole annuity (0% spousal, no guarantee)£7,086 £4,587
0% spousal annuity, 5-year guarantee£7,054 £4,575
50% spousal annuity, no guarantee£6,606 £4,087
50% spousal annuity, 5-year guarantee£6,590 £4,080

Source: Moneyfacts, June 2023

Is an annuity right for me?

A retirement annuity can be an important tool for many people because they provide a guaranteed income for the rest of your life – no matter how long that turns out to be. However, they are inflexible. Once you have bought one you are locked into the specified terms once the cancellation period has ended. It is therefore important to fully consider the pros and cons.

You don’t have to use your whole pension at once, so one way to combat the issue of inflexibility is to split your pension pot up and annuitise in tranches. If you are concerned rates could increase in the future, or if you want to build up your guaranteed income as your needs increase, you can do so. In the meantime, you stand to benefit from growing your pension pot by remaining invested, though that’s not guaranteed and your investments could fall in value.

Remember too that age plays a factor in your annuity income – the older you are, the better the annuity rate. You may prefer to use drawdown to begin with and buy an annuity later on to secure a higher amount of guaranteed income in later life. It is also worth noting that annuity income is taxable, so it may affect any potential income tax bill in the current tax year or future ones, and it can affect any means tested benefits.

How can I get the best annuity rates for me?

When buying an annuity the wrong decision could end up being costly. It could be one of the largest and most important purchases you ever make, so don’t just accept the annuity rate offered to you by your existing pension provider. Shopping around for the best rate can improve the level of income you receive by 10% or more.

It’s also important to include health and lifestyle details when getting annuity quotes. ‘Enhanced’ annuities offer higher income if you have a health condition or if you smoke. This can be another reason why delaying some or all of your annuity purchase can make sense. If you develop a health condition in later life then it will increase the uplift in rates available based on age alone. Finally, do bear in mind that some older pensions offer guaranteed annuity rates that may be significantly higher than those available on today’s open annuity market.

If you’re unsure about your options, speak to a regulated financial adviser who can help secure you the best deal as well as ensure the product meets your needs and objectives.

What happens to an annuity when I die?

This depends on the terms of your chosen annuity. Unless an income payment guarantee period, for instance for a minimum of five or ten years, or a spouse’s pension is built in, income from a lifetime annuity ceases on death,

These extra features are decided at outset and specified in the annuity quotes you receive if you choose to include them. The greater the income guarantees and death benefits, and the larger the spouse’s pension you include, the less annual income you will tend to be offered.

With a fixed term annuity, you receive a guaranteed income for a set number of years with an option to get money back at the end of the term.

Get in touch with our planning service today

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Guide to saving for your dream retirement

Download your free retirement guide, the ideal resource if you're looking for smart ways to save and invest towards your future goals.

See more

More insights

UK General Election: No return for the pension lifetime allowance but other pension reforms likely
By Rob Morgan
Spokesperson & Chief Analyst
14 Jun 2024 | 5 min read
General Election manifestos released – what could a change of government mean for your money?
By Rob Morgan
Spokesperson & Chief Analyst
13 Jun 2024 | 9 min read
Why resilience is the first step to financial success
By Rob Morgan
Spokesperson & Chief Analyst
07 Jun 2024 | 6 min read
How to combat drawdown risk
By Rob Morgan
Spokesperson & Chief Analyst
31 May 2024 | 6 min read

The tax treatment of pensions depends on individual circumstances and may be subject to change in future. It is always recommended that you seek advice from a suitably qualified investment professional if you have any doubt as to the suitability of a pension and/or the underlying investments. You should be aware that Stakeholder Pension Schemes are generally available and might meet your needs as well as a SIPP. Please remember the value of investments may fall as well as rise and your capital is at risk.