Is it the right time to buy an annuity?

BACK the day you would have reached retirement and used the proceeds of your defined contribution (DC) pension to purchase an annuity, guaranteeing you an income for the rest of your life. But in April 2015, everything got a little more complicated.

As Spiderman could have said under the circumstances, with choice comes great responsibility. After 2015, the thorny questions of a) whether to buy an annuity and b) when, if at all, are questions for most people wondering how to fund their retirement.

Annuity payments go up when interest rates are high and you lock in the rate on the day you buy an annuity, right now with interest rates on the way back and likely to rise further, anyone considering an annuity might very well ask, is it time to buy one?

Historical data shows that ten years ago, in January 2012, a 65-year-old could have bought an annual income of £5,860, without inflation protection, with every £100,000 in their pot of retirement. Currently, a 65-year-old buyer on the same basis could have purchased an annuity giving him £5,218 a year.*

Examples of current annuity rates of annual income purchased with £100,000

Single life annuity with no annual increase £5,218
Single life annuity increases with RPI inflation £2,868
Joint and survivor pension without annual increase £4,676
Joint life annuity increasing with the RPI £2,345

*Rate of pension at 16.2.22 on the basis of a man over 65 in good health. Joint living – based on one healthy dependent over age 62.

Now, if interest rates rise, annuity rates will also rise, which bodes well for anyone considering buying a short-term annuity. But that shouldn’t completely influence your decision. This is because the factors that determine exactly what you will get vary greatly from person to person. Age, gender, health, and choices like whether or not to opt for inflation protection, will greatly affect how much your £100,000 will buy you. There is no fixed rate on any annuity; two people of the same age, with the same fund value may be offered completely different annuity rates, based on all of the above.

So, in a nutshell, whether now is the right time to buy an annuity is a very personal one. For you it may not be, for someone else it may well be.

And you have other options. You can take a blended approach and use part of your pot to buy an annuity now. You can then buy another one later. And you could do that and keep the rest of your retirement capital invested in the meantime.

You could even ditch the idea of ​​the annuity altogether, keep your kitty invested, and use the pension withdrawal to withdraw money from your pension as and when you need it.

To find out what a sustainable levy strategy might look like, take a look at our pension levy calculator. A big appeal of levy, which shouldn’t be overlooked, is that if you have money left in the pot when you die, it can be left to your loved ones. If you die before age 75, they can access your fund money tax-free, subject to any available lifetime allowances, if any. After age 75, they will pay taxes based on their marginal income tax rate.

If you’re thinking about retirement, the government’s Pension Wise service offers free, unbiased advice to help you understand your options. You can access advice online at or by calling 0800 138 3944.

Fidelity Retirement Services also has a team of specialists who can provide free advice to help you with your decisions. They can also advise you and help you select products, but this will be chargeable.

Comments are closed.