The Return of the Annuity: Why Now Is the Time to Secure Your Retirement Income
Pensions
For years, retirement planning in the UK has been dominated by drawdown pensions, praised for their flexibility and control. As market volatility increases and interest rates climb, a quieter, more traditional option is making a powerful comeback, the annuity. Once overlooked, annuities are now offering some of the most competitive rates in over a decade, providing a level of income security that’s hard to ignore.
What is an annuity?
An annuity is a product that converts your pension savings, or even personal savings, into a guaranteed income for life or a fixed period. Unlike drawdown pensions, which rely on investment performance and market conditions, annuities offer certainty. They provide a guaranteed income, no matter how long you live or how the market behaves.
What’s the difference between drawdown and annuities?
Drawdown pensions (also known as flexi-access drawdown) remain popular for their flexibility. They allow you to manage your investments, withdraw funds when needed, and leave money behind for you beneficiaries. With that flexibility comes risk, especially during turbulent markets. Your pension pot could run dry earlier than expected if investments underperform or if withdrawals are not carefully managed.
Annuities in contrast, provide peace of mind. You don’t need to worry about managing your pot or market downturns. By buying an annuity with your retirement pot, the income is guaranteed. This makes them especially valuable for those who prioritise security and predictability in later life.
Is now a good time to buy an annuity?
Annuity rates are closely linked to interest rates and long-term government bond yields. With interest rates currently at their highest levels in over a decade, annuity income has significantly increased. In fact, some retirees today can secure up to 30–40% more income than just a few years ago.
Crucially, you don’t have to wait until you retire to take advantage of these rates. You can purchase an annuity now using all or part of your pension or even your savings, locking in today’s high rates while continuing to work or draw other income. This flexibility offers a strategic opportunity for anyone looking to safeguard their future income.
More Than Just a Fixed Payment
Modern annuities are not one-size-fits-all. You can tailor your annuity with several options that provide additional protection, and flexibility should it be required.
• Joint-life annuities: Continue payments to a spouse or partner after your death.
• Guaranteed periods: Ensure payments are made for a minimum number of years, even if you pass away early.
• Value protection: Return any unused portion of your original investment to your estate.
• Inflation-linked increases: Choose to have your income rise each year to keep pace with inflation.
These features make annuities a far cry from the rigid products of the past. With the right setup, they can offer long-term security while preserving some of the financial legacy you wish to leave behind.
A balanced approach to retirement
Many retirees now adopt a hybrid approach. Using part of their pension or savings to buy an annuity for guaranteed income, while keeping the remainder in drawdown for growth and flexibility. This combination can provide both security and adaptability, covering essential costs with an annuity and allowing for discretionary spending or inheritance planning with the rest.
Final Thoughts
With annuity rates currently at some of the highest levels seen in over a decade, they have become a more attractive option for those seeking stability in retirement income. Unlike drawdown pensions, annuities provide guaranteed payments, which can help mitigate the risk of outliving your savings or being affected by market fluctuations. They can be purchased using pension funds or personal savings and tailored with features such as inflation protection or spouse benefits. While annuities may not suit every situation, they offer a useful option to consider as part of your retirement plan.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested