Stock market volatility has wiped billions off the value of pensions, leaving some savers’ retirement plans in tatters. But one person who doesn’t have to worry is Roger Young.
When he retired in 2011 there was only really one option available for the pension pot that he had been saving into for 35 years. He felt that the rules on how and when he could make withdrawals were too restrictive and complicated, so he bought an annuity —a type of insurance policy that pays out a guaranteed income.
Three years later, when the government shook up the pension system, giving savers more options over what they could do with their pots, it was too late for people like Roger to benefit.
Annuities provide an income for life in exchange for a lump sum (usually your pension pot), and until the introduction of pension freedoms in 2014 they were the only retirement option for most savers. Now you have the option to take your pension pot as cash, leave it invested and take an income from it, buy an annuity or mix and match all three.
The freedoms, brought in by the then chancellor George Osborne when he was chancellor, were hugely popular, and have transformed the ways savers use their pensions, but for those who already had an annuity, they had no effect. Once you buy an annuity, there is no going back.
“When I heard about the changes, I thought: damn you, Mr Osborne,” said Roger, 70. “It annoyed me, because I could have done something different.”
Now though, he is thankful for his annuity every day.
The retired computer programmer from Truro, Cornwall, bought his first annuity in 2011 for £195,000. It was a level annuity, giving a fixed income of £10,000 a year that does not go up with inflation.
Two years later in 2013 he paid £327,837 for an escalating annuity, which pays out an income that increases 3 per cent each year. The payments started at £10,320 and this year he will get about £14,000.
Both are joint life annuities, which means that his wife, Margaret, 69, will keep getting payments when he dies, but at a lower rate.
Roger says that these guarantees are worth the world to them both.
“The money gets paid out every month and there’s no hassle,” he said. “I don’t have to faff around making sure I don’t run out of money like I would with a pension, and I don’t have to worry about the stock market crashing.
“Even if I was able to go back in time and could do something different, I wouldn’t now. I’m happy with what I’ve got.”
• What is an annuity and should you get one?
Annuities: the comeback kid
Annuity sales fell off a cliff after the pension freedoms gave savers a whole other range of options. The interest rates available on these policies also plunged, but as they have bounced back, so has demand. The number of annuities bought in 2024 reached a ten-year high of 89,600, according to the Association of British Insurers.
Annuity rates determine the level of income you will get from your lump sum, and are influenced by the yields on government bonds and the Bank of England’s base rate. When base rate was below 1 per cent from 2009 to 2021, annuity rates fell dramatically — in July 2016, a £100,000 lump sum would have bought you an annual income for life of just £5,100.
But Bank rate has since increased 14 times, peaking at 5.25 per cent in August before falling back to its present level of 4.5 per cent, and annuity rates have risen in tandem.
They hit a 17-year high in March when concerns about the outlook for the UK economy pushed up the yields on government bonds. A 70-year-old with a £100,000 lump sum could have bought an annual income of £8,440 for life — a rate of 8.44 per cent.
Now experts say that the best deals could be about to disappear, so it could be a good time to buy. The best income available for a 70-year-old with £100,000 this month would be £8,250.
“The Bank of England is expected to cut interest rates in May and may reduce them further in its bid to shore up growth,” said Helen Morrissey from the investment platform Hargreaves Lansdown. “Such a move could put downward pressure on annuity rates.”
When to buy
Although the best deals may be disappearing, it’s important not to rush into a decision.
“Getting too distracted by what rates are doing could lead you to make the wrong choice,” said Tom Selby from the investment platform AJ Bell. “The main thing is deciding which product is right for you.”
There are different types of annuities to consider — they can be level; escalating, or inflation-linked. You can get joint or single policies and they can be for life or for a fixed term, of say 20 or 30 years. And you can use an annuity alongside other pension income — it doesn’t have to be all or nothing.
There are also general drawbacks that you shouldn’t ignore. For example, annuities cannot be passed on when you die (unlike pensions), unless you buy a specific joint policy that will continue to pay out to a spouse. There is also no option to take a higher income if you need it in an emergency, as there would be if you kept your pension invested. Annuity income is taxable, so don’t use the 25 per cent of your pension pot that is tax-free to buy an annuity.
Taking out an annuity at a time of market turmoil also has its downsides, said Steve Webb, a former pensions minister who is now a partner at the pensions consultancy Lane Clark & Peacock: “Those who use their pension to buy an annuity when the market crashes will be locking in a loss. It means that your pot is smaller, and therefore so is the level of annuity income you can buy.”
One option is to use part of your savings to buy an annuity now, leaving the rest invested so it can grow and then could be used to buy another in the future.
“It’s absolutely vital to shop around. An annuity is not just for Christmas — it’s for decades,” said Webb.
How are you drawing on your pension in retirement? Let us know in the comments below
