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Find out how much income you could get from annuities versus income drawdown and the pros and cons of each approach.
7 January 2025 | 3 minute read
Annuities have been out of favour for the past few years as retirees looked at other ways of funding their retirement. Now, a series of interest rate hikes is making annuities look more attractive again.
Find out your retirement income options and the steps you may need to take in our comprehensive guide.
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While an increase in annuity rates is good news for anyone seeking a guaranteed retirement income, it doesn’t necessarily mean buying an annuity is the right choice for you.
Here, we explore how much income you could get from an annuity versus income drawdown, and what else to consider when you weigh up your options.
Our analysis shows that someone with £500,000 in pension savings who buys an annuity at age 66 could currently expect retirement income of up to £31,500 a year. If they had £1m in pension savings, that figure would rise to up to £63,000 a year1.
If they opted for income drawdown instead, a £500,000 pension could provide annual income of £31,500 until age 86 or £25,000 until age 95. This assumes the pension fund grows at 5% a year after charges and that the income increases annually with inflation (assumed at 2%). For a £1m pension, the corresponding figures are £63,000 and £50,000, respectively.
How much income you’re likely to receive is just one factor to consider when deciding how to access your pension savings. Whether now is a good time to buy an annuity will be completely personal to you. A financial adviser can help you decide on the right approach, but a useful first step is to understand the key differences between annuities and income drawdown.
An annuity will provide you with a guaranteed income for life, no matter how long you live. From day one, you’ll know how much income you’re going to receive each year. Annuities offer certainty – and that may be particularly reassuring if you’re worried about volatility in the stock market. On the flipside, annuities are inflexible – you can’t change your mind once you’ve bought an annuity, and you can’t vary your income to reflect any changes in your circumstances.
Income drawdown is more flexible because you can adjust the amount and frequency of your withdrawals. Your pension remains invested, so there’s also the potential for your savings to grow over the long term. However, there is a risk that your pension doesn’t last as long as you need it to – either because your investments don’t perform as well as you hoped or because you withdraw too much money. It’s really important to ensure your pension is carefully invested and that you have a robust drawdown strategy in place.
Taking a blended approach to retirement income – where you use part of your pension to buy an annuity and keep the rest invested – could give you the best of both worlds. You could, for example, buy an annuity to fund your essential expenditure; you may get some comfort from knowing you have a guaranteed income to cover your bills and weekly food shop. You could then use income drawdown for discretionary expenditure, withdrawing money as and when you need it.
Exploring your options for your retirement income may be particularly important as the chancellor announced in the 2024 Autumn Budget that the value of unused pension funds and death benefits will be included in a person’s estate for IHT purposes from April 2027.
If you have other savings and investments, you could also use these to fund your retirement. ISAs, for example, are a tax-efficient source of retirement income because withdrawals are completely tax free. A financial adviser will be able to look at all your assets and advise on the best way to access them in retirement.
The increase in annuity rates is certainly something to consider when you’re deciding on how to fund your retirement, especially if you’re worried about stock market performance. However, the decision that’s right for you will ultimately depend on your individual circumstances.
It’s really important to understand all your options and the risks involved. This is where getting some financial advice can help. An adviser will take the time to understand your goals and aspirations, and help you make sure your retirement plan is a resilient one. Let our ideas help you plan for the future with confidence.
1 Annuity assumptions: single life, monthly in advance, no guarantee period, 2% indexation, non-smoker, standard (healthy) rates, payable for life. Quotes obtained from Iress on 25 October 2024.
The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance.
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