When should you buy an annuity?

Some or all of your pension can be used to buy an annuity but whether it’s the right option for you depends on your circumstances.

Should I buy an annuity for retirement?

Annuities are financial products designed for people who want to receive a stable income during retirement.

When you buy an annuity, you’re essentially using your pension to pay a lump sum of money to an insurer. In exchange, they guarantee to pay you a fixed income each month for a set period or the rest of your life.

Two types of annuities are most commonly offered by providers:

  • Lifetime annuities, which guarantee a set level of income for the rest of your life.
  • Investment-linked annuities, which pay out regular income that can rise and fall but is guaranteed to never fall below a certain amount.

However, stability comes at the cost of flexibility; unlike a pension, you can’t alter your annuity plan or the amount it pays out once it’s been agreed.

If you prefer a mix of stable and flexible income, you could choose to spend only part of your pension on an annuity when you retire. For example, you could take out a 25% tax-free lump-sum, spend 50% on an annuity, and leave the remaining 25% in your pension to grow.

If you do decide to buy an annuity, there’s more to consider than simply wanting a stable income. You can compare pension annuity rates online, use an annuity calculator or speak to a financial adviser if you’re not sure what to do, in particular, if you’ve got a high-value pension pot or you’re looking at more complex annuity options.

Benefits of buying an annuity

Lifetime income

If you choose a lifetime annuity, there’s no risk of ever running out of money - even if you live to over 100!

This is a key benefit over a pension, which could eventually run out if you regularly take out money at a faster rate than it grows.

Stable income

Unless you choose an investment-linked annuity (which pays out depending on how well its investments are performing), you’ll receive a fixed income each month.

Not only is a stable income much easier to manage, it can contribute towards a stress-free lifestyle.

Protection against inflation

Some annuities guarantee to increase payouts in line with inflation, meaning you won’t have to worry about stretching your money further as you get older.

Bear in mind that this guarantee will increase the cost of purchasing the annuity or lower the amount the annuity will pay out.

Your family could receive income if you die

Some providers offer a Value Protected Annuity (or Capital Protected Annuity). If you die before receiving the amount you bought it for, the provider will make the remaining payments to pay out to your partner or family.

For example, if you paid £100,000 for an annuity but only received £60,000 while you were alive, the provider will set up a new £40,000 annuity for your next of kin.

Bear in mind that this guarantee will increase the cost of purchasing the annuity or lower the amount the annuity will pay out.

Guaranteed Annuity Rate

A Guaranteed Annuity Rate (GAR)’s offered by some pension providers and guarantees to pay regular income at a set rate if you purchase an annuity with that same provider. Guaranteed Annuity Rates are typically higher than those available when purchasing an annuity separately with a different provider from your pension provider.

Downsides of buying an annuity

You could be locked in for life

There’s no way of backing out of a lifetime annuity once you’ve got one. Unlike a pension, you won’t be able to exchange it for another annuity, or ‘cash out’ for a lump sum.

If you buy a fixed-term annuity, you’ll be limited the same way but only for an agreed period - for example, five or ten years.

Your money’s tied up

Should you ever need a quick injection of cash, you won’t be able to access the money that’s in your annuity.

This is unlike a pension, which you can dip in and out of should you need or want to.

You won’t benefit from future rate increases

Annuity rates (the percentage a provider will pay out each year based on your initial payment) change all the time. And although they’ve been falling fairly steadily since the 2009 recession, they could increase in the future.

A lifetime annuity won’t pay out more if annuity rates increase. But a fixed-term annuity could allow you to buy a new annuity at a higher rate at the end of its term.

You could receive less income than a pension

In certain circumstances, a pension may perform better than an annuity; for example, if the economy drastically improved during your retirement or you don’t live as long as expected.

However, an annuity is all about reducing risk - guaranteeing a stable income no matter what happens to the economy. An annuity has the same chance of outperforming a pension.

Can I buy an annuity with savings?

While annuities are designed to provide income during retirement, you don’t have to use your pension to buy one.

You could use cash from savings, selling other investments, or even releasing equity in your home. Or you could use a combination of these alongside your pension.

There can be significant downsides to some of these choices, so speak with a financial adviser if you’re not sure which is right for you.

At what age should I buy an annuity?

You can buy an annuity between the ages of 55 and 75. Higher annuity rates are generally offered to older people.

In addition, the earlier you buy one, the longer you’ll need to rely on it. So if you buy one at 55, you’ll need to pay more into it to receive the same level of income per year had you bought it at 65, for example.

Exactly when you should buy an annuity will depend on your circumstances:

  • How early do you want to retire?
  • How much income do you need each year?
  • How long do you expect to live?
  • How much can you afford to pay into an annuity?

If you’re in good health and have no immediate need to receive extra income, it may be best to wait to buy an annuity.

You also have the option of retiring before buying an annuity, and relying on your pension in the meantime. Bear in mind that any money you take out of your pension won’t be able to be spent on an annuity later on.

PensionBee Annuity

We’ve partnered with Legal & General to offer an annuity for those looking to retire with peace of mind.

  • Receive a guaranteed retirement income
  • Choose for it to continue to pay your loved ones when you pass away
  • Get a quote and apply in minutes online

If you’ve got several pension pots, it may be worth combining them. You’ll typically receive a higher income annuity from one larger pot than you could get from several smaller pots.

Annuities aren’t for everyone. If you’re looking for more flexibility, consider a drawdown pension.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 06-04-2024

Are you saving for your retirement?

Sign up to PensionBee and we’ll combine your old pensions into a new plan that you can manage online.

Get started now

Mobile PensionBee analytics chart
Mobile PensionBee analytics chart
Apple Store logo Google Store logo

Have a question?Call our UK team020 3457 8444

Monday-Friday: 9:30am-5pm