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Four questions to ask before buying an annuity

Updated 20 November 2023

5min read

Craig Rickman
Senior Content Writer

With rates soaring to 14-year highs, the annuity revival is in full swing. But there’s lots to consider before trading your retirement savings for a lifelong income

Find out the latest on buying an annuity below

Four questions to ask before buying an annuity

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We’ve all been there at some point. You buy something which, at the time, you're more than happy with. But then weeks, months, or perhaps years later, that gut-wrenching feeling slowly sinks in: buyer’s remorse. You massively regret your decision, but now it’s too late. 

Buyer’s remorse typically applies to expensive purchases that can’t easily be replaced such as cars or houses. And it can also apply to your pensions and investments. 

While weighing up the pros and cons is advisable before choosing any financial product, extra care should be taken when buying an annuity

That’s because with an annuity - which allows you to exchange some or all your pension pot for the security of a guaranteed income for life - once the 30-day cancellation period has expired, you can’t change your mind. In most cases, the terms chosen at outset are locked in for the rest of your life.  

And despite losing popularity a few years ago, partly due to the paltry income rates on offer but also because more consumers are opting to take pension benefits flexibly through drawdown, annuities are mounting a comeback.  

With interest rates and gilt yields rising sharply during 2022, annuity rates jumped 50 per cent to hit a 14-year high, meaning a healthy 65-year-old can now secure £7,000 a year from a £100,000 retirement savings pot instead of £4,660.  

This has piqued retirees’ interest in the product once again, with annuity sales rising 13 per cent in 2021/22. 

But before rushing into a decision you may rue later on, it’s important to take a step back. 

A good place to start is by asking yourself the following four questions, which will help you decide whether an annuity is right for you, and if so what type. 

1. Do I need a guaranteed income? 

This is the very first question you should ask. 

Upon reaching retirement, most people need to replace the income lost from giving up work. And given the state pension is unlikely to fully plug the gap, the secure nature of an annuity can offer a like-for-like replacement. 

That said, an annuity isn't suitable for everyone. If you already have sufficient guaranteed income from other sources - such as a defined benefit pension - or just crave greater flexibility, then drawdown might be more appropriate.

The same goes if your life expectancy is particularly short. In this scenario, losing access to your pot makes little sense.

With drawdown you can leave the money invested, draw lump sums whenever you wish, and your children can inherit what’s left once you pass away – though minus some tax if you die after age 75. 

The big risk with drawdown is that if your investments perform poorly, your withdrawals are excessive or you live longer than expected, your pot might not last the distance.

It’s also worth stating that the choice of drawdown versus annuity is not binary.  

In many cases, a blend of the two can work really well.

For instance, you buy an annuity to cover essential expenses such as bills, food, and holidays, and place the remainder in drawdown to fund big ticket items like a new car or home improvements. 

A further question to ask is whether you need a guaranteed income now or in the future. Because rates are heavily influenced by life expectancy, as you get older, they tend to improve.  

The key is to select the most suitable blend of annuity and drawdown for your individual wants and needs.

2. What type of annuity should I choose? 

Once you’ve decided that an annuity is appropriate, the next thing to consider is the type.

A good place to start is with the most basic annuity - which provides a level, fixed income for your life only – and then add the features and benefits best suited to your retirement goals

Disclosing your medical and lifestyle details during the application phase is especially important.

If your life expectancy is lower than average - either due to smoking or an underlying health condition - providers will pay you more.

These are called enhanced or impaired annuities, and can boost your income by 40 per cent. 

If you’re unwilling to commit to an annuity for life, for reasons such as you believe rates will rise in the future - you can buy one for a fixed term, which typically lasts between 1 and 25 years.

It pays a guaranteed income for your chosen period, followed by a lump sum when the annuity ends. 

A joint-life annuity pays an income to your spouse or partner after your death, typically at a reduced rate. Their age and and health will influence the rate offered.

A further option is to guarantee income is paid for a minimum of five-or-ten years, even if you die during this period. This feature is usually inexpensive. 

Escalating and index-linked annuities are designed for those who wish to offer some protection from rising costs – a hot topic right now.

However, a note of caution here – your income will start off significantly lower, and you may have to live for up to 20 years before breaking even. 

3. How do I find the best rate? 

One the biggest mistakes people make is not shopping around.

Due to something called the open market option, you can buy retirement income products from any pension provider, not just your current one. 

Shopping around can really make a difference. A Which? report in 2019 found that it could boost your retirement income by up to 20 per cent. So, whatever you do, don’t accept the first quote you receive. 

Instead, take your time to find the best deal. This might involve getting multiple quotes from multiple providers or using an online comparison tool. 

If you’re concerned about how much time this will take, or need help understanding exactly what you’re being offered, see point four. 

4. Am I confident or do I need expert advice? 

Few financial decisions require greater care and attention than selecting how to draw retirement income.  

After saving diligently for several decades, the last thing you want is to choose hastily and be stuck with the wrong product for the rest of your life. 

If after answering questions one to three you still lack the confidence to go it alone, it’s wise to seek expert advice.

A regulated financial adviser will take the time to understand your retirement income goals, and recommend a personalised strategy to help you meet them.

This might involve an annuity, income drawdown, or a combination of the two. 

What’s more, an adviser can scan the breadth and depth of the annuity market to find you the best rate and most appropriate product, offering you the peace of mind that you'll be financially secure in later life.  

Click below to connect with a retirement expert today.

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About the author
Craig Rickman is senior content writer at unbiased.co.uk. He has been writing about personal finance and wealth management since 2016, including four years as a journalist at the Financial Times Group. Prior to this, Craig spent eight years working as a regulated financial adviser. He holds the CII level 4 Diploma in Financial Planning.