Many Express.co.uk readers insist that annuities remain poor value even though they are paying a lot more income as interest rates rise. They argue that leaving your pension savings invested via drawdown is the best option. But are they right?
On Saturday, we reported that annuities now pay £1,000 a year more income than at the start of 2021 as the Bank of England hikes interest rates.
Today, a 65-year-old non-smoker with £100,000 can buy a level single life annuity income of £5,600 a year, according to Hargreaves Lansdown.
Even though returns on annuities have rocketed, Express.co.uk readers reacted with fury at any suggestion that people should consider buying one again.
Reader StraightThinking said annuities “are a joke and should be outright banned”. He added: “Any good side is wiped out by the many bad sides.”
One of the bad sides is that if you die shortly after taking one out, the income stops. “If anything happens to you, your spouse loses the lot.”
Until April 2015, pensioners were forced to buy an annuity at retirement, locking into a fixed, guaranteed income for life.
That obligation was scrapped under pension freedom reforms, and most savers now leave their money invested via drawdown instead.
StraightThinking said drawdown is better than buying an annuity. “Of all the pension reforms in the last 50 years, only one stands out. Pension freedoms.”
Another Express.co.uk reader, Dundee Arab, said that annuities lock you in for life, making them rigid and inflexible. “Once you have bought your annuity you are stuck with the terms.”
Dundee Arab added: “Everyone with a pension fund should take advice and look at drawdown.”
Reader Backfire also advised getting a good financial adviser to help set up drawdown. “You’ll always do far better than these annuities.”
Backfire added: “Also consider investing in bonds and stocks and shares Isas, to make big savings in tax.”
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Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said annuities are back in the spotlight as rates rise after years in the doldrums.
Rates should climb even higher but she added: “They remain well below what you could get prior to the 2008 financial crisis.”
She cautioned that taking anybody who takes out a level annuity will see their income fixed at that level for life. “As inflation rockets, income secured today will buy you less and less over the years.”
Morrissey said you can buy inflation-linked annuities, but they also have a downside. “Your starting income is markedly lower, and it can take many years to catch up.”
She also warned that an annuity purchase cannot be unwound if your circumstances change. “So you will need to live with your decision long-term.”
Yet there are arguments in favour of annuities, too.
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Annuities provide a guaranteed lifetime income, which will continue for as long as you live. This offers more security than drawdown, where a stock market crash could shrink the size of your pot.
Morrissey says savers don’t have to annuitise their entire pension at once. “One strategy could be to use slices of your pension to buy annuities over a period of several years.”
Alternatively, a combination of annuity and drawdown could work well. “The annuity could provide a guaranteed income to cover your day-to-day expenses, while you leave the rest in drawdown.”
This approach gives you the peace of mind of a guaranteed income with the potential for further investment growth and flexibility, she added.
Stephen Lowe, director at Just Group, said annuity income doesn’t necessarily die with you. “If you take out a joint life annuity, your partner will continue to receive 50 percent income for the rest of their life.”
Lowe said anybody who is worried that they will die shortly after taking out an annuity and lose all the money can buy a policy feature called value protection. “This allows you to pass on the remaining money to loved ones.”
The decision whether to buy an annuity or drawdown remains a complex one, so consider taking an independent financial advice.
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