How to make the most of annuities
Purchasing an annuity can help you de-risk your portfolio in retirement. Here we explore when you might consider an annuity, and how to get the best annuity rate.
Last Updated: 1 November 2023
An annuity remains one of the only ways to turn your pension into a guaranteed income for life. They continue to form the backbone of many people's retirement income. But when pension freedoms were introduced, their popularity dwindled. Many people decide to keep their pensions invested at the mercy of the stock market and make direct withdrawals instead.
Over the past year, annuities have started to make a comeback. This is largely thanks to a hike in interest rates pushing up the amount of secure income that an annuity could pay you.
In October 2022, annuity rates hit a 14 year high. They've since been steadily dropping, but people can still get a much higher income than this time last year. For example, someone aged 65 with a £100,000 pension can get an annual annuity income of £7,412*. This time last year the best rate they could have received was £5,003*. That's an extra £1,889 a year.
To help you make more of annuities, we explore when you might consider buying one and how to get the best annuity rate.
This article isn't personal advice. Annuity rates change regularly, and quotes are only guaranteed for a limited time. If you're not sure what to do with your pension, you should seek guidance from Pension Wise, the government's free impartial service to help you understand your retirement options. If you need more help, you could consider financial advice.
*Source: HL annuity index, 12/10/2023. This index tracks the top rate for a single life, level annuity, paid monthly in advance with a 5 year guarantee period and a £100,000 purchase price for a married person. Postcode PE29 7HG.
Should I consider buying an annuity?
If you don't want to worry about the ups and downs of the stock market, then an annuity could play a vital role in your retirement income strategy. Even if you decide to keep your pension invested to begin with, your attitude to risk might change in future. You might decide you want to increase your secure income stream later.
In fact, the recent rise of annuity rates might make current investors already drawing their pensions rethink their retirement income plans. It's likely that for many, annuity rates were unattractive at the time they started taking money from their pension. Now they may be more appealing.
Remember, money in a pension isn't usually accessible until age 55 (rising to 57 in 2028).
The benefits of buying smaller annuities over time
Let's say you were to use a significant chunk of your pension to buy an annuity at a single point. You'd be buying into an annuity rate at a particular time, and rates could be higher in the future. You'd also be choosing your annuity options once and for all - even though your circumstances may change and would only be factoring in your current health.
Buying an annuity doesn't have to be an all or nothing approach. You could decide to swap small portions of your pension for multiple annuities over time. This approach allows you to gradually de-risk your pension income throughout your later life, which could help to give you peace of mind during uncertain times. You're also likely to get better rates as you age, particularly if you develop health conditions.
It's worth getting annuity quotes regularly throughout your retirement. It will help you to keep an eye on ever-changing rates, plus it won't cost you anything using our online annuity tool.
How to get the best annuity rate
Shop around for the right annuity
Don't just accept the first annuity quote you find. Rates vary between providers and your current pension provider might not offer you the most for your money. It’s always worth shopping around to make sure you get the best deal.
Make sure you confirm your health and lifestyle details
Unlike some insurance products, if you disclose your health and lifestyle details when you get an annuity quote, you may get a better deal. Even confirming minor details like your height and weight could mean you get a higher annuity income. This type of annuity is known as an enhanced annuity.