Could an annuity lead to a happier retirement?

You might have been dreaming about retiring for years. Perhaps you can’t wait to pack your bags and travel the world. Or maybe you’re impatient to spend more time with your grandchildren.

Whatever your goals are, having all your ducks in a row financially could be the key to living out your dreams. Research by Legal & General, in collaboration with the Happiness Research Institute, has revealed that having a stable income could be a key contributor to retirement happiness.

So, perhaps it’s unsurprising that figures published by Professional Adviser show that annuity sales soared to £7 billion in 2024.

An annuity converts your savings or pension pot into a regular retirement income.

Keep reading to find out how annuities work. Then, discover some of the pros and cons of investing in an annuity to help you decide if this could be the key to a happier retirement.

An annuity provides you with a regular guaranteed income in retirement

You can use your pension pot to buy an annuity once you reach the normal minimum pension age (NMPA), which is currently 55 but will rise to 57 from 2028. Your NMPA may differ if you have a Protected Pension Age or suffer from a serious health condition.

Of course, you can also use savings and investments that sit outside your pension to buy an annuity, but this won’t be suitable for everyone and it’s worth seeking financial advice before doing so.

An annuity pays you a guaranteed income either for life or for an agreed number of years. As such, this may be an attractive option if you crave financial stability in retirement.

Indeed, Legal & General’s survey of more than 2,000 UK adults found that 94% of respondents said their most important retirement dream was to feel financially secure for the rest of their lives.

5 of the most common types of annuities

While all annuities offer a guaranteed retirement income, there are various types to choose from, including:

1. Lifetime annuity – Provides a guaranteed income for life. This could offer valuable peace of mind that you will be provided for financially no matter how long you live. You can also choose an annuity that adjusts your income in line with inflation.
2. Fixed-term annuity – Offers an income for a set period (typically at least 5 or 10 years), after which you will be paid a lump sum, called a “maturity value”. This might be an attractive option if you do not want to be tied to one provider’s annuity rate for the rest of your life.
3. Enhanced or “impaired life” annuities – This is designed for individuals with health conditions or certain lifestyle factors that are likely to result in a shorter-than-average life expectancy. An enhanced annuity usually pays a higher income than a standard annuity.
4. Investment-linked annuities – Combines guaranteed income with payments linked to investment performance, which may fluctuate. As such, there is the potential for achieving higher returns compared to traditional annuities. However, poor investment performance could reduce your retirement income.
5. Purchased life annuity – Provides a guaranteed income for life or a specified term. Your payments include a return of part of the capital you invested plus interest. This can be a tax-efficient option as you only pay tax on the interest part of your income.

Understanding the different types of annuities available could help you make an informed decision about your retirement.

Key factors to consider before investing in an annuity

Whether an annuity is the key to a happier retirement will depend on your circumstances, needs and goals. It might be helpful to consider the following pros and cons.

Pros of buying an annuity

• Financial stability – Annuities provide a guaranteed retirement income that could help you budget effectively and fulfil your long-term goals. This financial security may alleviate stress and boost your wellbeing.
• Protection from market volatility – Fixed annuities provide a guaranteed income stream and as such, they are generally less susceptible to market fluctuations. In contrast, if you choose to draw flexibly from your workplace or personal pension, market volatility could push the value of your pot up or down, affecting how much you can withdraw.
• An annuity can be purchased at any time – There is no requirement to buy an annuity before or when you retire. So, you could purchase one later in life when the rate you receive may be higher.
• There may be extra benefits with your annuity – You can tailor an annuity to meet your needs by shopping around to find one that offers the options you want. For example, you could choose an annuity that rises in line with inflation or one that allows your spouse or civil partner to receive your guaranteed income in the event of your death.
• You could reduce a potential Inheritance Tax bill – Buying an annuity could reduce the value of your estate for Inheritance Tax purposes. As such, your loved ones may benefit from more of your wealth after you’re gone.

Cons of buying an annuity

• Annuities are usually irreversible – Once you’ve bought an annuity, you can’t usually cash in or change it after the cooling off period (typically around 30 days) has passed. As such, it’s a significant commitment that requires careful thought.
• You could lose out on potential future gains – While the stability of a guaranteed income might be reassuring, many annuities (with the exception of investment-linked annuities) do not offer opportunities for growth.
• An annuity counts as taxable income – Whether you pay tax on the income from your annuity will depend on your other earned income, how much you draw from your pension, and how much you’ve used of your Personal Allowance (this is £12,570 for the 2024/25 tax year).
• Limited flexibility – While you can often tailor the type of annuity and associated benefits to meet your needs, you can’t usually opt to take more or less at any given time. In contrast, drawing flexibly from your pension could give you greater control over how much you take from your pot and when. This might make it easier to budget for significant expenses such as buying a new home or paying for your child’s wedding.
• Your loved ones may not benefit from your annuity when you die – How much of your annuity your loved ones will receive after you’re gone depends on the type of annuity you purchase. Some will pay your beneficiaries a portion of your income, but others may stop making payments altogether when you die.

While financial stability in retirement may sound attractive, as you can see, investing in an annuity may not lead to retirement happiness for everyone.

Seeking financial advice could help you weigh up the pros and cons against your situation and retirement ambitions.

Get in touch

If you’re looking for a financial planner in Bristol to help you review your finances and plan for a happier retirement, we can help.

Please get in touch either by email at helpme@aspirellp.co.uk or by calling 0117 9303510.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

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.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pension Regulator.

The Financial Conduct Authority does not regulate tax planning or estate planning.