Annuities for retirement are making a comeback. After years of declining sales, 2024 saw the highest number of annuities sold in over a decade. Rising interest rates have pushed payouts higher, tempting more retirees to swap their pension pots for a guaranteed lifetime income.

But is an annuities for retirement the right choice for you? While they provide security, they also come with key drawbacks that need careful consideration. Let’s break down the pros, cons, and alternatives.

Why Are Annuities Back in Demand?

For years, annuities fell out of favour. Before 2014, most retirees had little choice but to buy one. That changed when the government introduced pension freedoms, allowing over-55s to access their pension savings flexibly rather than locking into a fixed income.

Since then, most people have preferred to leave their pension invested, withdrawing money as needed. However, things are shifting again.

• Sales surged 24% in 2024, with insurers selling 89,600 annuities – the highest level since 2013.
• Annuity rates have risen significantly, thanks to higher interest rates and soaring gilt yields.
• Retirees are seeking security, especially after recent stock market volatility.

To put it into perspective, a 65-year-old with a £100,000 pension could now get over £7,500 per year from a single-life annuity. Just three years ago, that figure was closer to £5,000.

What Is an Annuity?

An annuity converts your pension savings into a guaranteed income for a set period – usually for life. In return for handing over a lump sum, an insurer agrees to pay you a regular income, regardless of market conditions or how long you live.

There are different types of annuities, each with advantages and trade-offs:

• Single-life annuities – Provide the highest income but stop when you die, leaving nothing for a spouse or family.
• Joint-life annuities – Pay out to your spouse after you pass away but offer lower initial income.
• Inflation-linked annuities – Start lower but increase over time to keep up with rising prices.
• Guaranteed period annuities – Ensure payments continue for a minimum number of years, even if you pass away early.

Is an Annuity Right for You?

Annuities provide certainty, but they also come with some key limitations. Before making a decision, consider the following:

Pros of Annuities

✅ Guaranteed Income – Unlike pensions left invested, annuities ensure you don’t run out of money.

✅ Protection from Market Fluctuations – Your payments won’t change, no matter what happens to stock markets or interest rates.

✅ Higher Payouts as You Age – The older you are when you buy an annuity, the higher your annual income.

Cons of Annuities

❌ No Flexibility – Once you buy an annuity, you can’t change your mind. You’re locked in.

❌ Lower Returns Compared to Investments – Leaving money in a well-managed investment portfolio could provide better long-term growth.

❌ Inflation Risk – If you opt for a fixed annuity, rising prices could erode the real value of your income over time.

Key Considerations Before Buying an Annuity

• Shop Around for the Best Rate – Different insurers offer different rates. The wrong choice could cost you thousands over your lifetime.
• Consider Delaying – Waiting until later in retirement can significantly boost your annuity income.
• Don’t Use Your Entire Pension – You can use part of your pension for an annuity while keeping the rest invested. This balances security with growth potential.

Alternatives to Annuities

If you’re unsure about committing to an annuity, there are other ways to manage your pension:

• Drawdown Pensions – Keep your pension invested and withdraw money as needed. More flexible but comes with investment risk.
• Fixed-Term Annuities – Provide income for a set number of years rather than for life.
• Mixing Strategies – Many retirees combine drawdown and annuities, using an annuity for essential expenses while investing the rest.

Final Thoughts: Should You Buy an Annuity?

Annuities can provide valuable peace of mind, but they aren’t the best option for everyone. If security and a fixed income are your priorities, they’re worth considering – especially with rates at their highest levels in years.

However, if you want flexibility, growth potential, or the ability to pass wealth to your family, other options might suit you better.

Given the importance of the decision, it’s always worth speaking to a financial adviser to explore the best approach for your situation.