3 harmful annuity myths, and the truth behind them

If you are approaching retirement or already retired, you may have explored the idea of buying an annuity to provide you with a steady later-life income.

An annuity is an agreement that provides a guaranteed retirement income for a specific period in exchange for some or all of your retirement savings, usually taken from your pension. For those who choose this option, annuities are a way of anticipating how much you will receive year-on-year, which may help when forming a sustainable retirement plan.

Yet sadly, there are prevalent myths around annuities that prevent many people, especially high earners, from considering this retirement income option.

While an annuity may not be the right choice for every retiree, it could help to understand how they work before you decide.

Knowing the truth about annuities is especially crucial in 2024, as according to Canada Life, annuity rates have soared by 54% since 2022.

An annuity with March 2024 rates would provide an average of £49,200 more income over 20 years than one bought in January 2022 – meaning you could be considering this retirement option more seriously than in previous years.

So, here are three common annuity myths and the truth behind them.

Myth 1: “Annuities are inflexible”

While it is true that an annuity agreement is usually irreversible once you have purchased it, the initial process of designing an annuity is highly flexible.

Indeed, one common misunderstanding of annuities is that they are a one-size-fits-all solution with very little flexibility.

There are usually several variables you can control when purchasing one. These include:

• How long the agreement will be in place for
• Whether the annuity will continue to provide for your spouse or other loved one after you pass away
• Whether you will receive a fixed or variable income
• Your annuity rate, meaning the percentage of your initial lump sum that will be paid as income (for instance, a lump sum of £100,000 used to buy a 5% annuity may mean you would receive £5,000 a year)
• When your annuity income is paid, and how often you receive it.

Talking through the type of annuity that may be appropriate with a financial planner could help you put together an agreement that helps you to meet your retirement goals.

Myth 2: “You can’t combine an annuity with drawdown”

Many people believe that to purchase an annuity, you need to spend your entire defined contribution (DC) pension pot on it.

In fact, you can use part of your pension (or other capital, such as Individual Savings Account (ISA) savings) to purchase an annuity.

This means that you could combine your reliable annuity income with flexi-access drawdown in retirement.

For example, you may wish to protect part of your retirement income from stock market volatility while maintaining financial flexibility over the years. If so, you could choose to buy an annuity with some of your pension pot, while keeping some of it invested.

Seeing as an annuity guarantees an income over a fixed period, your payments wouldn’t change in line with the markets if they experience a downturn as they did in 2020.

Meanwhile, the rest of your pension would still have the opportunity to see potential gains. Plus, you can keep investing into it throughout your retirement in order to grow your wealth for the next generation.

Having a stable annuity income that you can rely on, while maintaining enough flexibility to top up this income from your pension and other savings each year, could offer you the “best of both worlds” in some cases.

Myth 3: “You have to buy an annuity as soon as you retire”

Many of our clients who are at the point of retirement become anxious about all the decisions that lie before them. One of the factors that could be considered stressful is whether or not to buy an annuity with some or all your retirement savings.

Luckily, there is no rush to purchase an annuity on the day you retire. You could take several years to consider whether this option is beneficial for your family.

And, importantly, you may wish to prioritise securing the ideal annuity rate, rather than rushing into the options that are immediately available.

While there is no crystal ball that tells us how annuity rates will rise and fall in future, it is essential to remember that there is no need to rush into a decision as soon as you retire.

An annuity may not be right for every retiree

It is important to understand that the above myths surrounding annuities are untrue, and to know about the potential benefits of an annuity agreement.

However, it is also essential to see the potential drawbacks of annuities, so you can take a balanced view when making financial decisions in retirement.

Some potential downsides to annuities are:

• Once you have purchased an annuity you are locked into the agreement for a set time
• Using some or all of your pension pot to buy an annuity could mean you lose out on potential investment gains
• Buying an annuity may leave less wealth to pass down as inheritance.

As such, it may help to consider all your retirement income options before deciding to purchase an annuity.

Work with a financial planner to determine if buying an annuity could be beneficial to you

Your Kellands financial planner can discuss a broad range of retirement income solutions with you.

Email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

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

All contents are based on our understanding of HMRC legislation, which is subject to change.

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. 

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

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