Retirement Income  

When is the right time for an annuity to step in?

This article is part of
Guide to income in retirement and annuities

When is the right time for an annuity to step in?
(Chris Ratcliffe/Bloomberg)

For savers accessing their pension for the first time, data from the Financial Conduct Authority shows that while income drawdown remains popular, high annuity rates have put guaranteed pension income back in the spotlight.

More than 68,500 plans were used to buy an annuity between April 2021 and March 2022, while more than 200,000 entered income drawdown.

While rates are high, Mark Ormston, director of propositions and corporate partnerships at Retirement Line, suggests clients get an up-to-date and individually underwritten annuity rate.

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Regular reviews are also crucial to outcomes, Ormston says. “People’s circumstances change, and so does the financial environment. Regular reviews should include obtaining a personally underwritten annuity quote because at certain points in time the annuity rate being offered may become hard to ignore.”

But Ormston adds that the focus should not only be on yearly income.

He says: “Although fixed term annuities can be reviewed, once a lifetime annuity is in place, it cannot be undone.

“Another key point to mention is that people don’t need to view this as an ‘all-in’ decision. Clients don’t have to move all of their pension savings into an annuity, just because annuity rates are especially high right now.

“They can do partial annuitisation, taking advantage of high annuity rates while leaving some of their fund invested with the ability to access it if required.”

Different annuities for different phases

Because of their fixed nature, lifetime annuities are broadly unlikely to appeal to clients who expect significant changes in their financial needs throughout retirement, Ormston says.

Meanwhile, a fixed-term annuity is often taken in early retirement to bridge an income gap before the state pension or a final salary scheme comes into effect.

Data from Retirement Line also suggests that the older people are when they buy their annuity, the more popular longer guarantee periods and joint life annuities become.

Cecilia Furner, interim distribution director – retail annuities at Legal & General, says that at crystallisation as well as at every drawdown review, advisers should consider the full scope of decumulation options, to ensure income sustainability and optimum outcomes.

"Lifetime annuities provide longevity insurance, but market research – the PPI report and Milliman report – also points to the fact that a layered approach can provide better outcomes in many cases," Furner adds.

While not the case for every client, Fiona Tait, technical director at Intelligent Pensions, notes how many find themselves becoming more risk averse as they get older.

“They may also find themselves less inclined to make active decisions if they are experiencing a decline in their physical or mental health; and at the same time, these issues may mean that the client becomes eligible for an enhanced annuity rate," Tait adds.

These factors, combined with low rates for individuals who may have a life expectancy of at least 30 years in retirement, make annuities more attractive for older clients.

A client who delays buying an annuity from year to year will also need their drawdown fund to work harder if they want it to keep matching the income they could have received by switching some of their fund to an annuity, says Stephen Lowe, group communications director at Just Group.