Annuities provide certainty that drawdown cannot match. But once purchased, the income is locked in for life

After years in retirement wilderness – when rock-bottom rates and new pension freedoms made them look old-fashioned and poor value – annuities are staging a comeback.

Once dismissed as yesterday’s way to fund later life, these guaranteed income products are suddenly drawing record numbers of retirees, as higher rates make them worth a second look.

Analysis from Just Group shows that 62 per cent of people now shop around for the best deal when looking at annuities – the highest level since pension freedoms began in 2015. Some are securing thousands of pounds more over the course of retirement as a result.

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Annuities allow pensioners to buy a set annual income for life in return for their pension pot. This is the main alternative to drawdown, where you pull cash from your pot over your retirement and take responsibility for making it last.

But are annuities really the best way to make your pension work harder?

Here, we take a look at some of the key things you should consider before deciding if they are the right choice for you.

Understand your income needs

Your retirement income should be enough to cover your day-to-day expenses and, if you wish to do so, provide an income for any dependents after you die.

Many people live for 30 years or more after they retire, so you need to make sure you do not run out of money or incur unexpected tax bills, which means carefully planning when and how you access your pension pot.

Speaking to The i Paper, Nick Flynn, retirement income director at Canada Life, said: “You should look at how much money you have now – taking account of any loans or debts – and work out what income you’ll need to support the lifestyle you want in retirement. You might want to consider potential long-term care costs, too.”

How predictable do you want your retirement income to be?

Annuities provide certainty that drawdown simply cannot match, Mr Flynn said.

Once purchased, the income is locked in for life, regardless of how long you live or what happens to markets.

He added: “For many, this is valuable not just as financial security but as peace of mind, especially with increasing life expectancies.

“However, annuities are less flexible in that once you’ve chosen your income level, inflation protection, and whether to cover a spouse, the structure is fixed. That makes it vital to think through future needs carefully at the outset.”

Individuals can opt to use just a portion of their pension pot to buy an annuity, which secures a sustainable and predictable income that can be complemented by the flexibility and accessibility of drawdown.

Shop around for the best rates

With annuity rates at some of their strongest since 2009, experts say it is an “ideal time” for customers considering an annuity to explore their options and take advantage of the competitive rates available.

Different providers offer different rates, Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, pointed out. So, “it’s vital to look across the market when sourcing annuity quotes,” she said.

She added: “If you just accept the quote from your pension provider, you could find yourself thousands of pounds worse off over the course of your retirement. Using an online quote engine can help you source an array of quotes.”

Try not to buy too early

Former pensions minister Ros Altmann agrees that it makes more sense for people to consider using their pension cash to buy annuities now, but it is important to purchase the right type and avoid buying too early.

She explained: “The older you are when you lock into an annuity, the more chance you have of benefitting from any investment growth in the fund before you buy and from any changes in health that may secure you a better rate.

“With long-term interest rates at much higher levels, the value is definitely better now than for many years, and indeed the imposition of inheritance tax on unused pensions does reduce the risk of annuity purchase.

“But having a good rate is not the most important factor – finding the right type of annuity and buying at a later age are also crucial.”

For some, a joint-life annuity is best, or it could be an inflation-linked income that is more important, or an impaired life annuity.

It is also worth considering fixed-term annuities, she said, which can ensure you receive the balance of your fund back at the end of the fixed term.

She continued: “An annuity is not a simple product and ideally needs some advice to ensure you are doing the right thing.”