Could an annuity be a sensible way to access your pension in retirement?
Could an annuity be a sensible way to access your pension in retirement?
You’ve probably already given your retirement a significant amount of thought. Indeed, you might already have planned the activities you’ll do, how much you need to save, and how you’ll draw an income when you stop working.
You likely already know you can take the first 25% of your pension fund without incurring tax and then access the remainder flexibly.
This popular approach lets you choose when and how much to withdraw from your savings.
However, one method you might not have considered is purchasing an annuity. Many people overlook this option, even though its main selling point – income security – is exactly what lots of retirees are looking for.
Research from Money Marketing shows that only:
- 8% of people aged 45 to 60 have considered purchasing an annuity
- 10% of people aged 61 to 70 have considered purchasing an annuity.
Despite this, the same source reports that almost half (43%) of UK adults say certainty is the most important factor when planning their retirement income.
Before getting carried away by the apparent advantages of annuities, you need to work out whether they fit your specific retirement goals.
Read on to find out how annuities work and their main pros and cons, so you can decide whether they’re the right choice for you.
Annuities provide you with a guaranteed income during retirement
An annuity is a type of insurance product designed to turn some or all of your pension pot into a guaranteed stream of income for the next phase of your life.
The amount of income you receive usually depends on several factors, such as:
- The size of your pension pot
- Annuity rates at the time of purchase
- Your age, health, and lifestyle.
As a rule of thumb, if you’re older or in poor health, you might expect to receive a higher income from an annuity compared to someone younger or healthier.
This happens because the provider assumes you may not need the income for as many years.
It’s worth mentioning that annuity rates – which determine how much you receive in return for your pension savings – are currently relatively high. According to MoneyWeek, average annuity rates rose 9.68% in the 12 months leading to September 2025, reaching 7.65%.
This means that a healthy 65-year-old with a £100,000 pension could expect to receive an annual income of around £7,650. This is £670 more than in September 2024, when the average rate stood at 6.98%.
Annuities offer several notable benefits during retirement
The recent rise in annuity rates has undoubtedly made them more appealing, and there are a few other compelling reasons why you might choose to buy one – here are three.
1. They offer a guaranteed source of income
Perhaps the most persuasive reason to buy an annuity is that it will provide you with a guaranteed income in retirement.
Depending on the type of annuity you choose (more on this later), this income could last for the rest of your life.
This makes annuities a practical choice if you want the certainty of knowing you’ll have a regular income to cover some of your expenses when you stop working.
What’s more, if you don’t have other regular income sources in retirement, such as rental properties or dividend-paying investments, an annuity could be a helpful way to support your goals.
Alternatively, if you aren’t eligible for the full State Pension (or any of it), your annuity could help cover essential bills while you use other assets for big-ticket purchases like holidays or home renovations.
2. There are many types of annuities to choose from
As mentioned, your annuity income could either last for the rest of your life or for a set period.
This is because there are several different types of annuities you can buy, each with its own benefits.
Some of the main types to consider include:
- Life annuities – Pay a fixed income for the rest of your life.
- Escalating or inflation-linked annuities – Start at a lower initial payment that increases over time, either at a fixed rate or in line with inflation.
- Enhanced annuities – Pay a higher amount if your health or lifestyle means you have a lower life expectancy.
- Short- or fixed-term annuities – Pay for a set number of years, rather than the rest of your life. You can then buy another annuity at the end of the term if you wish.
This range of options gives you flexibility over how you receive your income in retirement, allowing you to choose an annuity that aligns with your specific needs and goals.
3. You can buy an annuity at any point in your retirement
Even if you decide that purchasing an annuity right at the start of retirement isn’t right for you, you still have the option to obtain one later.
For example, if you retire at 55 and spend 20 years living on your pension savings, you might decide at 75 that you’d rather have the certainty an annuity offers.
You may prefer this approach, as it offers the flexibility to use most of your pension savings as you wish before locking in a guaranteed income later in life.
It’s vital to remember that an annuity does come with some downsides
As is the case with most financial choices, annuities also have downsides to keep in mind. Read on for three.
1. They tend to be inflexible
Once you use your pension to purchase an annuity the decision is typically irreversible. After you’ve handed over your savings, you usually can’t change your mind.
You become permanently committed to the annuity until you pass away, or until the term ends. This means you should be certain that buying an annuity is the right move for you before you commit.
What’s more, if inflation is higher than your annuity rate, it will erode the real-term value of your income.
So, if your annuity isn’t inflation-linked, your purchasing power in retirement would effectively drop as inflation rises.
2. Your spending needs in retirement likely won’t stay consistent
While an annuity provides a regular, guaranteed income, your spending needs will change throughout retirement.
Indeed, when you initially stop working, your spending will likely be higher as you tick off items from your bucket list.
Then, when you reach mid-retirement, your spending might slow down as you’ve already achieved many of your more expensive goals.
As you enter the later years of retirement, your spending needs might increase again if you have to pay for later-life care costs.
Many annuities don’t account for these variable costs. So, flexibly drawing from your pension according to your needs at the time might be the wiser choice.
3. Rates can seem deceiving
Even though annuity rates have been rising in recent years, it’s still vital to consider carefully what income you would actually receive.
For instance, the rate you receive might be ideal if you’re 65 and want a level annuity with no guaranteed period or spousal benefit.
However, if you plan to retire before 60, have a spouse, and want to ensure the annuity protects them against high inflation, these factors could significantly affect what you need from an annuity over the course of a 25-year retirement.
After you factor in all these aspects before purchasing an annuity, you might realise that you won’t receive the exact rate you first saw.
Moreover, annuity rates typically follow interest rates. If the Bank of England reduces the base rate, annuity rates could also follow suit.
This could mean you need to settle for an option that meets your specific requirements but doesn’t pay out what you’d realistically need to achieve your goals.
Get in touch
We could examine your unique goals for retirement and help you determine whether an annuity would be the right choice for you.
To find out more, please call us at 01822 617 960, email info@hansfordbell.co.uk, or fill in our online contact form, and we’ll be in touch.
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