Your retirement plans probably revolve around using a pension to provide you with income during your later years. So, you may be wondering how best to access the value contained within your fund.

You may be intending to take your pension gradually as income when you retire. Or perhaps you plan on using flexi-access drawdown to take a lump sum, leaving the remainder invested.

One other option you may have heard of is an “annuity”. In the past, annuities tended to be a common choice for retirees, especially for those in defined contribution (DC) schemes but their popularity has since waned as people have sought more flexible options for their retirements.

According to figures from the Financial Conduct Authority (FCA), just 31,100 people bought an annuity between October 2019 and March 2020, compared to nearly 38,000 between April and September 2018.

Even so, there are still benefits to annuities that could make them suitable for your needs. In fact, according to FTAdviser, annuity rates bounced back in October 2021 after having been on the decline since 2019. That means annuities are arguably the most attractive they’ve been for over two years.

So, what is an annuity? And could they be a viable option for your retirement? Here’s what you need to know:

You can use your pension to buy an annuity

An annuity is a type of insurance product that you can buy using some or all of your pension fund. In return, for the rest of your life, you’ll receive a guaranteed regular income each year.

The amount that you’ll receive will depend on a variety of factors, including:

– The size of your pension pot

–  The current annuity rates at the time you buy

– Your age

– Your health and lifestyle.

People who are older or in poor health can often expect to receive more in monthly income than younger, healthier people. This is because the insurer presumes that these people will die earlier, and so the annuity will not have to pay an income for as long.

Pros of an annuity

A guaranteed source of income

The biggest advantage of buying an annuity is that it provides a guaranteed income for life.

Annuities are independent of what happens in the stock market, whereas stock market dips can affect retirement income if your pension is still invested.

The income you receive from your annuity will remain constant, regardless of wider economic circumstances. That means you’ll know exactly what you’ll receive each year and can make your retirement plans around it accordingly.

You could receive more than the value of your pot

As part of the terms of the annuity, your provider must continue to provide your annuity income, even if that means your income ultimately becomes greater than the amount you paid for the product.

Of course, the provider’s job is to pay you a rate based on how long they think you’re likely to live. But, if you exceed that expectation, you could end up receiving more than the value of your pension pot.

A variety of available products

The standard annuity product where you receive a fixed amount for the rest of your life is known as a “level” annuity. Additionally, there are various annuity products available that can help to add some extra flexibility to your retirement.

For example, you could buy an inflation-linked annuity, also known as an “escalating annuity”. This means the amount you receive rises each year in line with inflation.

Choosing this kind of product can help to ensure that your money continues to have the same spending power in real terms, no matter how long your retirement is.

Other available annuity products include:

– Guaranteed annuities, in which the amount you’re paid is fixed for a certain number of years and paid out for that time, even if you die before the end of the payments.

– Joint-life annuities, paying you an income until you die, and then paying this amount to your partner or spouse until their death.

– Enhanced annuities, a product specifically for people in poor health or with lifestyle conditions that mean they’re likely to die sooner than standard annuity expectations.

Cons of an annuity

Annuities are typically not flexible

Perhaps the biggest downside of an annuity is the lack of flexibility that the product offers.

There are nearly no circumstances where you can get out of your annuity, and you won’t be able to cash in on the value, either.

So, while you will receive a guaranteed income for the terms of the annuity, there will be no way out of it if your financial needs change.

You could receive less than the value of your pot

On the flipside of receiving more than your pension is worth, you could also end up with less.

For one thing, if you take a standard level annuity with a fixed payment and you die before you receive as much as your pension fund was worth, you’ll have lost out on all that retirement income.

Indeed, this includes giving up on the potential investment returns that your pension might have generated in the meantime. The value of your pot could potentially continue to rise during your retirement.

But, by choosing an annuity, you’ll be entirely giving up on these returns.

You’ll need to shop around for the best rates

Aside from not knowing how much of your annuity you’ll actually receive, you’ll also need to shop around to find the best rates and the right annuity for you.

This can be a confusing, time-consuming, and potentially expensive process if you don’t know where to start or what you’re looking for.

Work with us

If you’d like to find out whether an annuity could be an appropriate choice for you, or you have any questions or concerns about your retirement, please get in touch with us at Cordiner Wealth.

Email or call 0113 262 1242.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.