Stable retirement income: 7 things to consider before buying an annuity

Retirement is a hard-earned reward after a long working life, an opportunity to live the dream lifestyle you’ve been working towards over the years.

Yet Unbiased reports that almost 75% of Brits are considering putting their retirement plans on hold, citing concerns about being able to afford not to work amid the cost of living crisis. So, in light of that concern, how might you guarantee a stable and secure income throughout your retirement?

One potential solution could be to buy an annuity. According to MoneyWeek, annuity rates have recently hit a 14-year high — the highest since the 2008 financial crisis — and the added security, as well as the emotional wellbeing boost, could be significant.

Read on to discover what an annuity is, why their rates are so high currently, and how they might be a solution for any ongoing retirement income concerns.

An annuity can be bought and will likely provide you with a secure retirement income

Rising interest rates and gilt yields have pushed annuity rates to hit their highest levels since 2007/08. As a result, owning an annuity has become an increasingly desirable option if you’re soon-to-be or currently retired and you want to gain a stable retirement income.

According to Legal & General, lifetime annuities have seen their average annual rate soar from around 4.8% in January 2022 to almost 6.4% in February 2023.

This not only offers annuity holders the chance to draw a greater regular income from the same initial investment, but also effectively reduces the break-even point — at which a buyer would receive their initial outlay back through annuity income — from nearly 21 years to around 15.

An annuity is typically bought from a provider for a lump sum. They in turn agree to pay you a regular income — normally guaranteed for the remainder of your life.

Your annuity income will likely be decided by certain factors, such as:

• Your health
• Your age at the time of purchasing your annuity
• The provider’s annuity rates at the time of purchase
• Any extra benefits you want included in your annuity.

Before deciding to invest in an annuity, it is important that you consider the pros and cons.

4 benefits of owning an annuity

1. An annuity is likely to provide you with a guaranteed income for the rest of your life

Annuities typically pay a guaranteed income throughout retirement, no matter how long you live. This not only provides considerable security and peace of mind, but it could also lead to you earning back more than you originally invested if you live past the break-even point.

2. You don’t have to invest all your retirement funds into an annuity

An annuity is purchased from a provider and you don’t have to convert the entirety of your pension savings.

So, you could opt to buy an annuity with a portion of your funds in order to provide you with a stable form of retirement income, while also retaining extra funds in your pension pot to draw on later as you choose.

3. An annuity doesn’t have a set purchase date

You do not need to purchase an annuity before or upon retiring. It is possible to acquire one later in life, when rates are typically higher, and the benefits to your overall plans might have increased.

4. Some annuities can come with added benefits such as providing for your loved ones after you’re gone

There are a wide range of available annuities with different added benefits and respective rates. It is possible to buy an annuity that will pass on your guaranteed income to your spouse or civil partner in the event of your death.

It is important you shop around for the right option for you before parting with your funds.

3 downsides of owning an annuity

1. An annuity is irreversible, and you can’t withdraw your funds at a later date

Once you’ve bought an annuity, you can’t usually change your mind, and take your pension savings back. It is a permanent move and one you should carefully consider. Retaining funds in a more flexible traditional pension pot might be the right move for you.

2. An annuity counts as taxable income

An annuity may be taxed as it is defined as earned income. This is dependent on:

• Your other earned income
• How much you draw from your pension
• How much of your Personal Allowance you’ve used.

3. An annuity isn’t investment linked, so while stable, has no chance of growth

Annuities aren’t typically linked to markets, so while they are stable and secure, they also don’t offer the chance of growth. It might be better for your overall plans to invest pension funds elsewhere to see the growth generated on your wealth needed to achieve your desired level of comfort in retirement.

Get in touch

If you are intrigued by the security of owning an annuity and are weighing up whether to take advantage of currently high rates, you should first get in touch to determine how one might fit into your overall plans.

Reach out to us by email at helpme@aspirellp.co.uk or call 0117 9303510.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.