6 key pros and cons of annuities, and how financial advice can help

Before the rules changed in 2015 and offered greater flexibility over how you access your pension, annuities used to be one of the most popular ways to create a retirement income.

A form of insurance product, you can purchase an annuity using some or all of your pension savings. In return, you receive a guaranteed income – often for the rest of your life.

An annuity can potentially be a useful part of your financial plan, providing a valuable income that could help you achieve your goals in later life.

They’ve been particularly newsworthy in the past couple of years or so, too, as annuity rates – a determining factor in how much income you receive when you buy one – have risen alongside interest rates.

According to Legal & General, annuity rates rose 34% between March 2022 and March 2024, marking a significant increase.

As a result, it may make annuities look more attractive right now, knowing that you might get more for your money than you could have previously.

That said, there are potential drawbacks to annuities, and there may be reasons why one might not be appropriate for you.

Read on to discover three pros and three cons of annuities, and how financial advice can help you come to the right decision for you.

3 pros of buying an annuity

1. Receive a guaranteed income

The main benefit of purchasing an annuity is that you can receive a guaranteed income for the rest of your life.

This might be useful if you want the certainty that you’ll have a regular income to cover your essentials throughout your retirement.

It may be particularly helpful if your circumstances mean that you don’t have any other form of regular retirement income, too. For example, if you aren’t eligible to receive the full amount of State Pension, choosing an annuity could be an appropriate decision to ensure you have a steady income you can use to pay for bills and essentials.

2. There are various types of annuities to choose from

There are a few different types of annuities that could be useful to you, depending on your circumstances:

• Level annuities, paying a fixed income for the rest of your life.
• Escalating or inflation-linked annuities, which pay a lower amount initially that then increases over time.
• Enhanced annuities, usually paying a higher amount if your health or lifestyle means you have a lower life expectancy.
• Joint life annuities, ensuring that your spouse or partner continues to receive a (usually lower) income after your death.

• Short- or fixed-term annuities, running for a set number of years rather than for the rest of your life. You can then choose to buy another annuity when the term ends.

The various options available could mean you’re able to find an annuity that suits you.

3. You can buy one at any point in your retirement

Even if you don’t annuitise your savings right at the start of your retirement, you still have the option to buy one later.

For example, imagine that you retire at 55 and spend 20 years or so living on your pension savings. You might then reach age 75 and decide you’d rather have the certainty that you’ll have a regular income for the rest of your life, and so spend a portion of your remaining pension funds at that stage.

This blended approach can be preferable, offering the flexibility of using your pension as you wish initially, before then locking in a guaranteed income moving forward.

Of course, the rates may change if you decide not to buy one at the moment you review the options available. In fact, research reported in FTAdviser suggests that older buyers have the most to lose, with a larger gap between best and worst rates available at age 75 than at 70 or 65.

Even so, if an annuity doesn’t suit your circumstances right now, you have the option to revisit it later.

3 cons of buying an annuity

1. Annuities are inflexible

Perhaps the most notable drawback of purchasing an annuity is that the decision is irreversible. Once you hand over your pension savings for the annuity, there is no changing your mind.

You’ll be permanently locked in (or until the end of the term) when buying an annuity, so you need to be certain that it’s the right choice for you.

Another key issue here is that you won’t be able to benefit if annuity rates rise again.

2. Your spending needs may change over time

Part of the issue with annuities being inflexible is that, although it may be useful to receive a guaranteed income, your spending needs may change throughout retirement.

You may have read our previous article in which we explain how often, your retirement income needs will be greatest when you initially stop working and start ticking off the items on your bucket list.

Then, there might be a drop in spending as you’ve achieved those goals and reached an age where you no longer need to spend as much. Finally, there might be another increase later on if you have care requirements in later life.

Throughout these periods, receiving a fixed income might not suit you. Instead, being able to flexibly draw what you need from your pension at any given stage might be more appropriate.

3. Headline annuity rates may look attractive – but they might not tell the full story

While headline annuity rates may look tempting, it’s vital to look beyond them and see what sort of income that would translate into for you.

For example, the rate you see may be ideal if you’re 65 and want a level annuity with no guaranteed period and no spousal benefit.

But, let’s say you’re looking to retire before age 60. You have a spouse and want to ensure that the annuity you choose protects them. Furthermore, inflation can quickly erode the value of your money, with its spending power decreasing as the cost of living rises over time. Throughout the course of a 25-year retirement, that could be significant.

As a result, when you look to factor these aspects into the annuity you want to purchase, you might suddenly not be receiving the rate you initially saw. Instead, you’d have to settle for an option that meets your specific requirements, but that doesn’t pay out what you’d really need to achieve your goals.

Taking personalised advice can help you reach the right decision for you

So, with these pros and cons in mind, now comes the tricky bit of deciding whether an annuity is right for you.

Ultimately, regardless of the individual pros and cons of annuities or the current rates you can lock in, choosing whether to buy one comes down to who you are, what you want to achieve, and how your wealth is organised.

If you would like the certainty of a guaranteed income in retirement, an annuity might be appropriate.

Equally, if you’d rather have the flexibility of being able to draw what you like from your pension, then you may be better suited not annuitising – and remember, you could always buy an annuity later down the line if you wanted to.

Financial advice and planning can help when making a decision like this. At Douglas White Financial Planning (DWFP), we always say that you need to “know your numbers”.

We’ll help you work out what your financial situation is now and what you’d like to achieve in retirement. Then, we’ll make suggestions and recommendations for organising your wealth so you can reach those goals.

That might involve buying an annuity if it would help you achieve your targets. Or, we might identify alternative options that are more suitable in your individual circumstances.

If you would like personalised retirement advice, we can help at DWFP. Email info@douglaswhiteltd.com or call 0151 345 6828 to speak to us today.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.