Recent fluctuations in the stock market have led to significant losses in pension values, putting many retirement plans at risk. However, Roger Young is one individual who feels secure about his financial future.

Upon his retirement in 2011, Roger faced limited choices for his 35-year savings, ultimately opting for an annuity. This financial product guarantees a consistent income throughout retirement, a decision he made because he found the withdrawal rules too cumbersome and restrictive.

Three years later, in 2014, the government revamped the pension system, allowing for more flexibility regarding retirement funds. Unfortunately, this change came too late for those like Roger, who had already committed to an annuity.

Annuities, which offer lifelong income in exchange for a lump sum payment (typically from the pension pot), were the standard retirement solution prior to the introduction of pension freedoms in 2014. Currently, retirees can opt to withdraw cash, keep their funds invested while drawing income, purchase an annuity, or use a combination of these options.

The pension freedoms, initiated by then Chancellor George Osborne, became widely popular and changed how individuals approach their retirement savings. Nevertheless, for existing annuity holders, like Roger, these changes provided no additional benefits, as an annuity is a one-way commitment.

Roger, now 70, reflects on the reforms with some frustration: “When I learned about the new options, I thought: ‘Curse you, Mr. Osborne.’ It was disheartening because I could have pursued alternatives.”

Despite his initial disappointment, Roger now appreciates the reliability of his annuity.

A retired computer programmer residing in Truro, Cornwall, he purchased a level annuity in 2011 for £195,000, providing him with a fixed yearly income of £10,000, which does not adjust for inflation.

In 2013, he invested £327,837 into an escalating annuity, which increases by 3% annually. The initial payments commenced at £10,320, and this year he anticipates receiving approximately £14,000.

Both of his annuities are designed as joint life policies, ensuring that his wife, Margaret, 69, will continue receiving payments after his death, albeit at a reduced rate.

Roger emphasizes the security that these guaranteed payments provide. “The income arrives monthly without complications. I no longer need to stress over exhausting my funds like I would with traditional pension withdrawals, nor do I have to fear a stock market downturn,” he shared. “Even if I had another chance to choose differently, I would stick with what I have now. I’m satisfied with my situation.”

Annuities: A Resurgence in Popularity

After the onset of pension freedoms, annuity sales dramatically declined as savers explored new options. Interest rates for these policies also dropped. However, as interest rates have started to recover, so has the interest in annuities. In 2024, the number of purchased annuities soared to a decade-high of 89,600, according to the Association of British Insurers.

Annuity rates dictate the income generated from the lump sum and are influenced by government bond yields and the Bank of England’s base rate. For more than a decade, low base rates—falling below 1% between 2009 and 2021—resulted in significantly reduced annuity rates. For instance, July 2016 saw a £100,000 lump sum yield an annual income of barely £5,100.

Since then, the Bank has raised rates multiple times, reaching a high of 5.25% in August before settling back to 4.5%. This increase has had a direct positive effect on annuity rates.

In March, annuity rates met a 17-year peak amid economic uncertainties in the UK, where a 70-year-old could turn a £100,000 lump sum into an annual income of £8,440—an attractive rate of 8.44%.

Experts caution that the best annuity deals might soon be gone, signaling that this could be an advantageous time for potential buyers. Currently, the optimal income for a 70-year-old with a £100,000 investment would be around £8,250.

Helen Morrissey from investment platform Hargreaves Lansdown warns, “The Bank of England may lower interest rates as soon as May, which could lead to a decrease in annuity rates.”

Timing Your Purchase

While the prime annuity offers may be diminishing, retirees should avoid hasty decisions.

“Being overly influenced by fluctuating rates could result in a misstep,” advised Tom Selby from AJ Bell. “It’s crucial to determine what type of product aligns with your needs.”

There is a variety of annuity types available—fixed, escalating, or inflation-linked. Options exist for single or joint policies and can be structured for either a lifetime or a set term of 20 to 30 years. Retirees may also consider combining annuities with other forms of pension income, allowing for more versatile financial strategies.

It’s important to note the inherent downsides to annuities. For example, unless a joint option is purchased, annuities typically do not continue to provide income after the policyholder’s death. Additionally, accessing higher income in emergencies is not possible with annuities as it would be if funds were kept invested. Lastly, while annuity income is taxable, retirees should retain the tax-free 25% portion of their pension pot when considering an annuity purchase.

Steve Webb, a former pensions minister and current partner at consultancy Lane Clark & Peacock, points out another risk: “Purchasing an annuity during a market downturn could lock in losses, thus reducing the total retirement income obtainable.”

One strategic approach might involve allocating part of your savings to buy an annuity now while keeping the remainder invested for future growth, which could be utilized for purchasing an additional annuity later.

“It’s essential to compare different offers. Remember, an annuity isn’t just a short-term choice—it’s a long-term commitment,” Webb emphasized.

How are you planning to manage your pension during retirement? Share your thoughts in the comments.