The flexibility of pensions drawdown doesn’t always trump the secure income provided by annuities.
When George Osborne, the then-chancellor of the exchequer, announced that pension savers would no longer have to use their funds to buy an annuity on retirement, many people in the pensions industry thought that annuity sales would dry up. Most savers would jump at the chance to draw an income directly from their pension funds, or simply to cash the whole thing in, advisers reasoned. A product requiring savers to lock into a fixed rate of income for life at the time of their retirement could hardly compete.
But while annuity sales slumped during 2016 and 2017, the market showed signs of recovery last year. And in 2019, providers such as Legal & General have reported increased sales. That’s partly because of pension schemes buying annuity contracts in bulk, but demand from individuals has risen as well – and not only from savers whose pension funds are too small for income drawdown to be practical. The financial advice group LEBC says the average saver buying an annuity through it during the first four months of the year had a pension fund worth around £177,000 – that was 17% more than last year.
Underlying this new-found enthusiasm for annuities is recognition of the value of the certainty they offer – that is, an income guaranteed for as long as you live. Clearly, they still have some significant drawbacks: they are inflexible compared to income drawdown, they offer less scope for leaving unused savings to your family after your death and annuity rates remain low by historical standards. For many savers, however, these will be prices worth paying for a low-maintenance approach to financial planning that offers security for your retirement.
Moreover, while average rates have fallen this year, the annuity market has become more competitive, with providers offering an increasingly bespoke range of products. These not only offer higher incomes to many savers – including people in certain areas of the country, those retiring from particular professions, and those with health problems – but also many more product features.
This makes the choice harder for those coming up to retirement. If you want absolute certainty about your retirement income for life, an annuity is your best option. But even if you can afford to take some risk, you may still decide an annuity is the better choice for part or all of your savings.
Get advice before buying an annuity
Anyone considering buying an annuity on retirement should get specialist support with the purchase. The recent scandal at Standard Life – the insurer was last month fined £30m for offering its staff big bonuses for selling annuities that may have disadvantaged customers – underlines the potential pitfalls.
The golden rule is that pension savers should always investigate the open market option. You are not required to buy the annuity on offer from the provider that looks after your pension fund – and it is likely you’ll get a better deal elsewhere.
The Money Advice Service’s online annuity comparison tool is a good place to start to familiarise yourself with the sort of choices you’ll need to make in picking an annuity contract. But specialist annuity advisers can help you narrow down the field and secure the highest possible pension income given your circumstances.
Your age, gender, health, former occupation, geographical location and lifestyle will all make a difference to the income you can secure. Research published by Hargreaves Lansdown last year suggested 56% of savers could be entitled to an enhanced pension because of one or more of these factors – with an average uplift of 14% on offer – so getting advice on how to maximise your annuity income will pay off.