After years in the doldrums, annuities have undergone a real revival in recent years with incomes soaring off the back of rising interest rates. Even though interest rates have since fallen, annuity incomes haven’t, staying just below the highs we saw towards the end of 2024.
The latest data from HL’s annuity search engine shows a 65-year-old living in an average postcode with a £100,000 pension can get up to £7,832 per year from a single life level annuity with a five-year guarantee paid monthly in advance.
This article isn’t personal advice. Remember, you can usually access money in a pension from age 55 (rising to 57 in 2028). If you’re not sure if an action is right for you, ask for advice.
The government’s free Pension Wise service can help if you’re over 50 and need guidance about your retirement options. You should also get personalised financial advice if you need it.
Why picking the right annuity matters
Annuities can give you real peace of mind, securing a guaranteed level of income in retirement. Using an annuity to take care of day-to-day essentials could also give you the flexibility to leave the rest invested where it has the potential to grow further and you can take extra income as and when it’s needed.
However, you do need to choose carefully. Once bought, an annuity can’t be unwound, and different providers will offer different quotes. So if you don’t shop around, you risk missing out on thousands of pounds over the course of your retirement.
A recent search on HL’s annuity search engine showed the difference between the top and bottom quote for a 65-year-old with a £100,000 pension, looking for a single life, level annuity with no guarantee was hundreds of pounds a year. Stretch this out over a twenty-year retirement and you’re missing out on thousands, so it’s well worth taking the time to check what’s out there.
Using an online annuity search engine lets you quickly assess the market to see what’s available and make sure you’re making the right long-term decision.
As well as looking across the different providers, there are a few other things you should think about before committing to an annuity. And remember, annuity quotes are only guaranteed for a limited time. Rates can also change regularly and go up or down in future.
Joint life or single?
The incomes from a single life annuity are higher than those from a joint life product, so it’s tempting to tick that box. But if you’re married or in a civil partnership this approach risks leaving your partner struggling if you die before them. Joint life annuities will continue paying an income to your partner even after you die, so it’s worth considering if this is the right option.
Level or escalating?
Again, level annuities have a higher starting income than escalating ones. The most recent data from HL’s annuity search engine shows a 65-year-old buying a single life level annuity with a five-year guarantee, with a £100,000 pension, can get up to £7,832 per year. However, an annuity that grows 3% per year (with all the other factors staying the same) has a starting income of £5,945.
It may seem like a straightforward decision, but you could be retired for a long time and inflation will nibble away at your purchasing power. The income from a level annuity may look suitable at the beginning but over time you may struggle.
An escalating annuity grows every year. So, you need to weigh up how long it would take for the income from the escalating product to catch up with what you get from a level annuity. After that, how long will it take before you’ve got more overall income from the escalating annuity than you would have got from the level one? It could be well over a decade so needs careful thought.
Any health conditions?
It may feel counterintuitive to put all your health conditions down on your application form as you may feel like you will be penalised. However, giving a full account of your health could qualify you for an enhanced annuity and that could be a real income uplift.
Mix and match?
You don’t have to put all your eggs in one basket and annuitise all your pension at once.
Instead, you can annuitise in slices throughout your retirement and leave the rest in income drawdown where it has the chance to benefit from further investment growth which can shelter your income from inflation, over time. But remember that investments can go up and down in value, so you could get back less than you invest.