The number of retirees choosing an annuity to generate an income is on the rise. Yet, research suggests millions of people may be overlooking the option because they don’t understand how annuities work.

An annuity could provide you with a way to create a guaranteed income throughout retirement. It’s something that you purchase, and it will then pay out a regular income. Given rising inflation and investment volatility over the last couple of years, it’s not surprising that some retirees find annuities to be an attractive option.

According to statistics from the Association of British Insurers (ABI), annuity sales soared by 22% in the first three months of 2023 compared to the same period in 2022.

However, a separate survey indicates some retirees may be disregarding annuities even though it could be an option that’s right for them.

19 million over-50s could be overlooking annuities

A survey conducted by the Financial Services Compensation Scheme (FSCS) found that just 10% of over-50s are willing to take risks with their money. Yet, despite an annuity providing a guaranteed income, just 28% said they either have one or would consider buying one.

Alternatives to annuities could mean your retirement savings are exposed to investment volatility. So, for risk-averse retirees, annuities may be an option to consider. The FSCS estimates that 19 million over-50s could be overlooking annuities.

Annuities could alleviate some of the key concerns those nearing retirement have.

37% of people that are unwilling to take risks say they worry about not having enough money to last the duration of their retirement. A guaranteed income could ease financial concerns for some people and help them enjoy the next chapter of their life.

Misunderstandings may be to blame for some over-50s disregarding annuities.

• 25% of survey participants said they didn’t understand how annuities worked.
• 26% said they worried a provider would go bust. However, UK-regulated insurers are protected by the FSCS, so retirees would usually still receive an income if this happened.

Annuities could form a valuable part of your retirement income, but you need to weigh up the pros and cons to understand what’s right for you.

The pros and cons of annuities you need to know

3 key benefits of annuities

1. They provide a guaranteed income

One of the potential benefits of annuities is that they provide a guaranteed income. So, you may feel less concerned about running out of money in your later years. For some retirees, this could provide peace of mind.

2. It is possible to link your income to inflation

When you’re selecting an annuity, you can choose one that will provide an income that would increase each year in line with inflation. As the cost of living is likely to increase during your retirement, a static income would gradually buy less and less. An income that’s linked to inflation may help preserve your spending power.

3. They could provide an income for your partner

If you’re doing your retirement planning as a couple, you may also choose an annuity that would continue to provide an income after you pass away. It’s a step that may ensure the long-term financial security of both you and your partner.

3 potential drawbacks of annuities

1. They are less flexible than alternative options

Compared to some options, an annuity is less flexible. For instance, if you choose flexi-access drawdown, you could increase or decrease the income you take based on your needs. An annuity will provide a regular income, but if you wanted flexibility, you’d need to use other assets to do this.

2. You wouldn’t benefit from potential investment returns

As you’ll use your savings to purchase an annuity, the money won’t remain invested as it may with other options. While this means you’re not exposed to investment volatility, you also wouldn’t benefit from potential returns either. If growing your wealth is part of your retirement plan, an alternative may be better suited to you.

3. Some annuities may have high fees

Annuities may come with higher fees when compared to alternatives. However, fees can vary between providers, so understanding the potential costs is crucial when you’re weighing up the different options.

A financial plan could help you create a retirement income that suits you

There are several ways to access your pension and you can choose to mix and match the different options. So, understanding your retirement goals and what suits you is crucial. As financial planners, we can work with you to put together a retirement plan that’s right for you.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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.