Don’t overlook one of the easiest ways to get a steady retirement income

Many people tune out the word “annuity” or think it’s something their parents or grandparents might have bought. But actually, they’re making a real comeback.
After pension freedoms came in back in 2015, annuities fell out of favour because people liked the idea of flexibility.
But in 2024, annuity sales in the UK skyrocketed to their highest level in a decade – about £7 billion in sales. That’s a 34% jump from the year before.

In this article, we’ll look at the reasons behind the big increase and why more over 50s are starting to give annuities a second look, especially those who want a simpler, more predictable way to fund their retirement.

WANT A RETIREMENT PAYCHEQUE?
That’s What an Annuity Is Popular in the 1980’s, annuities are making a bit of a comeback right now.

At its core, an annuity is really just a way to turn the money in your pension pot into a guaranteed income. It’s like setting up your own personal monthly paycheque that continues for the rest of your life.

If you’ve got a defined contribution pension pot, you can take up to 25% of that pot tax-free when you retire. That’s your lump sum, your “holiday money” if you like. The rest you can use to buy an annuity, which will pay you a steady income, either for a set number of years or for the rest of your life.

The annuity income is taxed like earnings, but the upside is that you don’t have to worry about running out of money at 87, 92, or even 102. A lifetime annuity keeps paying out for as long as you’re alive.

By now you may be thinking: “Okay, but why not just keep my pension invested and dip into it when I need to?” Fair point. That’s where pension drawdown comes in.

Drawdown earnings are more uncertain which means you’ve got to keep an eye on investments. You have to budget carefully and there’s a risk your pot could run dry, especially if markets dip or you live longer than expected.

With an annuity, you trade flexibility for certainty. For many, especially those who just want their essential bills covered every month, it’s a trade-off that’s worthwhile.

• Do you want guaranteed income every month?
• Are you someone who sleeps better knowing your money’s safe and predictable?
• Do you want to avoid investment risk in retirement?

If you answered yes to any of those, an annuity might be worth a closer look, but you don’t have to go “all in”. You can annuitise part of your pot, maybe just enough to cover your rent, groceries, and utility bills. You can leave the rest invested, take lump sums, or do whatever suits your lifestyle.

WHICH TYPE OF ANNUITY IS RIGHT FOR YOU?
There are quite a few different annuity types, and your choice affects how secure, flexible, or generous your income ends up being.

The lifetime annuity
This one’s simple. You hand over part (or all) of your pension pot to an insurance company, and they pay you a regular income for the rest of your life. No matter how long you live – 85, 95, or even 105, you keep getting paid. It’s great if you want certainty and don’t want to worry about the ups and downs of markets.

Fixed-term annuity
If you’re not quite ready to lock things in for life, a fixed-term annuity gives you an income for, say, five or ten years, and then you get a lump sum at the end, which you can use however you like. You can use the lump sum to buy another annuity or switch to drawdown. It’s a good option if you think annuity rates might improve later, or you just want more control.

Enhanced annuity (or impaired life annuity)
You might qualify for a higher income if you’ve had serious health issues, such as cancer, heart conditions, diabetes, or even if you’re a regular smoker. Why? Because the provider expects to pay you for fewer years, so they offer better rates. Not exactly cheerful, but it could mean more money in your pocket. Just remember that it’s important to be open and honest about your health when you apply.

Joint life annuity
This one keeps paying out after you die to your spouse or civil partner. You can choose how much they get, usually 50%, 67%, or even 100% of your income. It starts lower than a single life annuity, but gives peace of mind if you want to make sure your partner’s protected too.

Level annuity
This pays you the same amount every year. Sounds fine now, but after 10 or 15 years, inflation can eat away at that income. What buys a basket of groceries today might only get you a few tins of beans in the future.

Escalating annuities
They increase your income by a fixed rate every year – usually something like 3%. It includes inflation-linked annuities, which rise with the Retail Price Index. So if inflation goes up 6% next year, your income does too. The trade-off is that they start at a lower level than a flat annuity, so it’s like playing the long game.

Examples
Still not sure which annuity type is right for you? Here are some examples to illustrate the choices.

Karen, 63, is single and in good health. She’s got a £100k pension pot and wants something simple that covers her bills every month. She might go for a lifetime annuity, just for peace of mind.

Now, Graham is 60 and just got through a rough patch with his heart. He still wants to retire next year. Because of his health, he could qualify for an enhanced annuity, as it means more monthly income than someone his age in perfect health.

And then there’s Rachel and Steve, both 67, retiring together. They decide on a joint annuity, so if one of them passes away, the other still gets 67% of that income every month.

ADD-ONS THAT COULS GIVE YOU MORE CONFIDENCE AND CONTROL
Once you’ve decided an annuity could work for you, you’ve still got choices to make. Most annuity programs offer add-ons for more protection and flexibility.

Value protection
Value protection lets you cover some or all of the money you use to buy your annuity in the event something happens to you. You can usually choose to protect 25%, 50%, 75% or even 100% of your original pot.

Say you use £80,000 from your pension pot to buy an annuity, and then, sadly, you pass away a few years later, having only received £20,000 in income. If you’ve chosen value protection, the provider can pay out the remaining amount, minus what’s already been paid, to someone you’ve named.

Guaranteed payment period
This one’s all about making sure someone gets your income when you’re gone. Let’s say you pick a 10-year guarantee. That means the annuity will pay out for at least 10 years, no matter what. If you die after 3 years, it keeps paying someone you’ve named for the remaining 7. Some providers let you go up to 30 years. It’s a great way to give you and your family some extra reassurance.

Payment choices
You can choose to be paid monthly, quarterly, or annually. Within that, you can decide whether the money lands in advance (start of the month) or in arrears (end of the month).

If you’re used to a monthly salary, you might want to stick with that rhythm in retirement. If you’re relying on that income to cover things like rent or energy bills, timing can make a difference.

BLENDED STRATEGIES – MIXING ANNUITIES WITH DRAWDOWN OR LUMPP SUMS
For many retirees, it makes sense to use a blended strategy that lets you combine different income options like annuities, pension drawdown, and lump sums to fit your lifestyle and goals.

Let’s say you’ve got a pension pot of £200,000. You don’t necessarily want to lock the whole thing into an annuity. Fair enough. But you also don’t want to stress over bills if markets take a dip.

Here’s a different approach. You use £100,000 to buy a lifetime annuity that pays your essential expenses, like housing, food, and utilities. That way, you’ve got your basics covered for life. You’re not worrying about budgeting when you’re 85 or checking the FTSE when you’d rather be in the garden.

You keep the rest of your pot in drawdown, where it stays invested. You dip into it as and when needed for things like holidays, home repairs, and unexpected costs. Having a pot of money on standby like that gives you a lot more flexibility.

An annuity gives you stability. Drawdown gives you freedom. When you blend the two, you can get the best of both worlds – a steady income plus room to breathe.

You can also use short-term or fixed-term annuities that give you income for 5 or 10 years and then you get a lump sum at the end, called a maturity value. It makes sense if you think annuity rates might improve in the next few years or want some guaranteed income now with an option to reassess later.

RISKS OF TAKING ANNUITIES IN RETIREMENT
Before you commit to anything with your pension, you want to know what could go wrong. Because while annuities offer stability, they’re not perfect. Let’s talk through the trade-offs.

Irreversibility
With most annuities, once you buy it you can’t change your mind. It’s a bit like sealing the deal on a house – you sign the paperwork and the money’s committed. Therefore, you’ve got to be sure it fits with your retirement goals before you sign on the dotted line.

Early Death
Say you put £100,000 into an annuity, but you only live a few years beyond retirement. Without any added protections, your provider keeps the rest. The money doesn’t go to your family. That’s why add-ons like value protection or a guaranteed income period are worth considering.

Tax Considerations
The first 25% of your pension pot can be taken tax-free, but once your annuity starts paying out, those payments count as taxable income. Depending on your total income, that could push you into a higher tax bracket. It’s something to watch if you’ve got income from other pensions, property, or part-time work.

Annuity income can also affect your eligibility for means-tested benefits, like Pension Credit or local authority care support. Because it counts as guaranteed income, it can reduce what you’re entitled to or even make you ineligible altogether.

Inflation
A lot of people buy what’s called a level annuity, which pays the same amount every year. This might sound good, but over time the value of that income can shrink considerably.

£1,000 a month might cover your bills now. But in 15 years? It might not stretch nearly as far, especially if the economy takes a nosedive.

That’s why some people choose an inflation-linked annuity, or an annuity that escalates by a fixed percentage each year. The downside is your starting income is lower, but it keeps pace with rising costs and protects your “future self”.

FEEL OVERWHELEMED? HOW TO GET HELP WITH ANNUITIES
When it comes to annuities, there’s quite a lot to take in with all the different types, add-ons, tax rules, and the big decision of whether it’s right for you.

Don’t worry – you don’t have to figure it all out on your own. Here are some tips on how to get help with annuities.

• Start with Pension Wise: It’s a free, impartial guidance service backed by the government, and it’s a great place to begin. You’ll speak to someone who can walk you through your options and help you feel more confident before making any big decisions.
• Call Age UK: If you prefer to talk to someone who understands the concerns of older people, Age UK offers a free advice line. They can help explain your options in plain English and point you toward local support too.
• Speak to a regulated financial adviser: If your pension pot is on the larger side, or your situation is a bit more complex (maybe you’ve got income from multiple sources or want to blend strategies), getting personalised advice is a smart move. A good adviser can help you make the most of your money and avoid costly mistakes.

At Aria, we have advisers who specialise in retirement income planning. If you’re unsure about annuities or want help deciding how to split your pension pot, we’re happy to chat.

Book a free, no-pressure call with someone who knows the retirement landscape and understands annuities.