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Retirement planning: Why are UK adults shunning annuities despite rising rates?

Karl 28th Jun 2023 No Comments

Reading Time: 5 minutes

Despite rising annuity rates, new research has revealed less than a third of UK adults have an annuity, or would consider buying one.

In this article, we’re going to explore what annuities are and whether they’re a good option for retirement. Keep on reading for all the details or click on a link below to jump straight to a specific section…

What is an annuity?

Annuities are offered by insurance companies and if you buy one you’ll get a guaranteed income in retirement.

If you have a ‘lifetime annuity’, this income will be paid to you until you die. If you have a ‘fixed-term annuity’, then you’ll get it for a fixed period of time.

The size of your annuity income will depend on a number of factors, including the rate you’ve managed to lock in, plus your age, health, and ultimately how much you’ve been able to put down to buy an annuity in the first place.

Since ‘Pensions Freedoms’ were introduced in 2015, private pensions holders aged 55 (rising to 57 from 2028) have been able to withdraw up to 25% of their entire pension pot tax-free. Because of this rule, some pension holders choose to buy an annuity aged 55.

Importantly, it’s worth knowing that there’s no requirement to buy an annuity with all of your pension pot. The percentage of your pension you choose to exchange for an annuity is entirely up to you (and you may decide not to buy an annuity at all). Also, if you’ve already bought an annuity, you’re allowed to buy another in the future.

Types of annuities

‘Lifetime’, ‘Fixed-term’, ‘Investment-linked’, and ‘Impaired life’ and the four main types of annuities. Here’s a quick overview of the differences between them….

  • A lifetime annuity is paid until death. If you buy this type of annuity, you’ll have certainty as to how much income you’ll have to live on in retirement. The downside, however, is that if you die early you may get back less than you put in.
  • Fixed/short-term annuities are paid for a set period – typically five to 10 years. As well as getting a fixed income for a defined period of time, there’s also usually a ‘maturity payment’ which is paid to you once the fixed term ends.
  • An investment-linked annuity pays both a guaranteed income, plus an income that’s based on the performance of the stock market. The type of income you can expect to receive from this type of annuity is far less certain than other annuity types.
  • Impact life annuities are designed for those with health issues. These typically pay higher retirement incomes than other types because holders are more likely to have a lower life expectancy.

Why are UK adults turning their backs on annuities?

According to the Financial Services Compensation Scheme (FSCS), 19 million UK adults aged 50+ aren’t considering annuities for retirement. This means less than a third (28%) of this age group are interested in buying an annuity.

FSCS’s research also revealed that just one in 10 of those aged 50+ said they were willing to take risks with their cash. A lack of understanding of how annuities work, plus fears about providers going bust were other big reasons why many said they wouldn’t consider buying an annuity.

FSCS: Most UK adults aged 50+ are ‘risk averse’

Commentating on the research, Lila Pleban, Chief Communications Officer at FSCS, highlighted how most UK adults aged 50+ are risk averse. She explains: “It is not surprising that most UK adults aged 50+ are risk averse when it comes to their money. At this stage of people’s lives, they are likely to choose safety and stability over volatility and uncertainty. However, what is surprising is that many people are not willing to even consider an annuity because they don’t fully understand what it is.

“There are pros and cons to every option out there for your pension pot, whether you choose a guaranteed income or a more flexible drawdown approach, and retirement choices are very personal.”

Pleban goes on to highlight the importance of adults having access to important financial knowledge.

She explains: “It is clear from our latest research that those aged 50 and over must have access to the knowledge and tools they need so they can choose the right retirement product for them. That’s why at FSCS we are committed to empowering and educating consumers, so they feel confident about the decisions they make when it comes to their money.”

It’s worth knowing that annuities provided by UK-regulated insurers are fully protected by the FSCS. This means that if your annuity provider goes bust you won’t lose your guaranteed retirement income. To learn more about this you can use the annuity protection checker tool on the FSCS website.

Are annuities a good option for retirement?

Up until a year or so ago annuity rates were dire.

If you wanted a guaranteed income in retirement to provide you with a decent standard of living, it would have cost you big time – we’re talking potentially hundreds of thousands of pounds.

Therefore, it’s not surprising that many retirees have shunned annuities over the past decade and a half.

Yet with interest rates rising, money is no longer cheap. Because of this, annuity rates have been soaring, particularly over the past year.

Back in October 2022, we reported that annuity rates had risen by 44% in a year and, most recently, we explained how they’d risen 20% since June 2022. That’s a huge rise over the past 18 months or so and it now means typical a 65-year-old can buy an annuity and get up to £7,144 per year from a £100,000 pension pot.

Because rates are now rising, there’s no doubt that annuities have become a lot more attractive for retirees in recent times.

Yet whether or not an annuity is right for you does take a lot of thought. After all, buying an annuity is a big decision and pretty much non-reversible.

Don’t forget about inflation…

Inflation is still on the rise which means that the Bank of England is likely to continue raising interest rates.

This means there’s every chance annuity rates will continue rising. Because of this, you may be reluctant to lock in an annuity rate today – especially if you’re the type of person who would likely regret making a bad financial decision.

Also, rising inflation is of course detrimental to the value of our money. This is another reason why you may wish to think twice about buying an annuity right now as, unless you buy an ‘inflation-linked’ annuity (which can be poor value),  given the current environment we’re in the value of any guaranteed retirement income will fall over time. Of course, finding a place for your wealth in order to hedge against inflation is a challenge for all of us right now!

To learn more about saving for retirement, take a look at our article that explains all you need to know about pensions.

Do you want to learn about investing? If so, why not sign up for our fortnightly MoneyMagpie Investing Newsletter? It’s free and you can unsubscribe at any time.


MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing or planning for their retirement should conduct their own due diligence.

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Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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