With interest rates set for more cuts, expectations are that we’ll see annuity rates start to fall too.
After years on the retirement income sidelines, the higher interest rates ushered in a golden era for annuities with income soaring. They’ve since fallen back, but right now a 65-year-old with a £100,000 pension can get up to £7,104 per year from a single life level annuity with a 5-year guarantee, which we think is still good value. This figure is based on an average postcode and paid monthly in advance.
It’s important to say, we aren’t expecting the Bank of England to cut rates anywhere near as quickly as they raised them. Any falls in income should be much more gradual, so don’t feel pressured into making a snap decision.
Once bought an annuity can’t usually be changed, so it’s important to consider your options carefully. The government’s free and impartial Pension Wise service is a good place to start to help you understand your retirement options. This article isn’t personal advice. If you’re not sure if an action is right for you, ask for financial advice.
Five tips for buying an annuity
You don't have to annuitise at once
You don’t have to annuitise your pension all at once. Retirement can last for twenty years or more and your circumstances could change massively in that time. Annuitising in stages could also mean you benefit from any higher annuity rates as you age.
It’s not either annuity or income drawdown – you can have both
You can have an income drawdown and an annuity. Annuities can be used to secure some guaranteed income for your day to day needs while keeping the rest invested in income drawdown where it has the potential to grow, and you can withdraw as needed.
This is a great way of harnessing the guarantees of an annuity with the flexibility of income drawdown – it doesn’t have to be an either-or – you can have both.
But make sure you’re comfortable with the higher risk of having drawdown as part of your retirement plan. Investments and any income from them can go down as well as up in value, and you could get back less than you invest. You could run out of money if your investments don’t perform as you’d hoped, or you take too much income too soon.
Shop around
Once you buy an annuity, it can’t usually be changed so make sure you compare the whole market before you take the plunge. Using an annuity search engine will give you a range of options from different providers, so you can choose the option that’s best for you.
Provider quotes can differ by hundreds of pounds a year and this can add up to thousands of pounds over the course of a retirement. Remember, annuity quotes are only guaranteed for a limited period and rates will go up and down.
Consider all your circumstances
When looking it’s tempting to choose the one which offers the highest income at outset. But you should consider all your circumstances.
A 65-year-old with a £100,000 pension might be able to get up to £7,104 per year from a level single life pension with a 5-year guarantee. But if they were to die their spouse could be left with nothing.
A joint life 50% level annuity with no guarantees for the same person, could deliver up to £6,493 per year, according to our annuity search engine. It’s a lower income but gives you the peace of mind that if you die before your spouse, they would still get an income. The joint life figure assumes the spouse is three years younger than the person buying the annuity.
Be honest about your health
It really does pay to be honest when it comes to your health conditions. Details like whether a person smokes or has a condition like diabetes can really push up how much income they get.
Recent data from our annuity search engine shows that a single life annuity for a married man aged 65 with a £100,000 pension and no guarantees, paid monthly in advance, could get £1,000 more a year by including that they’ve had a stroke. Or, a £300 more a year by including that they smoke ten cigarettes a day.