5 common annuity myths (and why they’re wrong)

When you come to draw a pension income at retirement, you now have more choices than ever before. 

However, with choice comes complexity and it’s hardly surprising to discover that many UK adults are disengaged when it comes to funding their retirement and maximising the benefits their pensions provide. 

Indeed, Actuarial Post reports that half of consumers find pension information “overwhelming” and highlights the need for pension education. 

If you want to generate a reliable, stable income in retirement, you could consider buying an annuity. While they may have declined in popularity in recent years, annuities are an effective way of generating a guaranteed income during retirement. 

However, there are various annuity myths and misconceptions that can cause confusion and make it harder for you to make the most suitable decisions for your circumstances. 

So, understanding exactly what annuities are and how they can be a viable option is important. 

An annuity could provide you with a regular guaranteed income in retirement

Typically, you can buy an annuity with some or all of your pension pot. It will then pay you income every year for life, or for an agreed number of years. 

There are a variety of annuities available, ranging from fixed-term and lifetime to investment-linked and purchased life annuities. Finding the most suitable one for your needs is important, so discussing your options with an experienced financial planner can be beneficial. 

To help you to understand the pros and cons of annuities, here are five common myths and why they aren’t as relevant as you might think. 

1. “Annuities don’t offer good value”

A recent survey carried out by Canada Life revealed that around a fifth of over-50s don’t consider annuities to be good value. Primarily, this is because people are under the impression that all annuities have high charges or fees and don’t provide a decent income.

However, as you can see from the graph below, lifetime annuity rates have been rising in recent months and reached a near 14-year high in October 2022. Indeed, in the 18 months up to October, rates rose by almost 50%. 

Source: Canada Life

With a variety of annuities available from a multitude of insurers, it’s important to do your research and make sure you’re getting the most suitable deal for your circumstances. 

In the current market, they can offer excellent value – and significantly more annual income than they perhaps did a year or two ago.

2. “Annuities are inflexible”

Over two-fifths of those over 50 (44%) regard annuities as inflexible, with many having concerns over not being able to change annuity options if their circumstances change in the future. 

Additionally, there is a fear that annuity options may lock you into the specified terms once the cancellation period has ended. 

However, the myth that annuities are completely inflexible doesn’t completely ring true. Indeed, joint-life, guaranteed, and index-linked annuities can all help you to tailor your income to your specific needs. 

Additionally, you could consider buying a flexible annuity, which could enable you to choose how much income you open the annuity with and adjust income levels whenever you wish. 

3. “Annuities are risky”

In the survey carried out by Canada Life, 45% of over-50s considered annuities to be risky. This is because they believed that if anyone died earlier than expected, they would lose any money due to them. 

This isn’t entirely true. In fact, you can choose longer guarantees and value protection when buying your annuity. Doing so would effectively provide a “money back” guarantee, which would mean that if you were to die early, your nominated beneficiary would receive any remaining income. 

Additionally, PensionsAge reports that rising annuity rates have also meant that the “break-even” point has dropped by five years, to 14.5 years. This is the point at which you receive your original investment back through income and highlights just how much rates have improved in recent years.  

4. “I have to take an annuity with my current provider”

One of the most common myths surrounding annuities is that you must buy an annuity from your pension provider. However, this isn’t necessarily the case. 

In fact, you may well find better value from an annuity by shopping around and looking beyond your existing pension provider. 

This is supported by a recent report from Professional Adviser that revealed that failing to shop around can see pensioners missing out on at least 16% of retirement income each year. Indeed, a healthy 75-year-old with a £50,000 pension could miss out on £650 a year if they buy the least competitive annuity. 

Furthermore, the gap between the best and worst available annuities widens with age, so it’s important that you carry out your due diligence and shop around, rather than accepting the first offer.  

5. “Annuities can’t match inflation”

Due to the cost of living crisis, you may be looking for a guaranteed income in retirement and want to combat inflation where possible. 

If this is the case, you could be considering annuities but have been put off by a common myth that these products can’t match the current high inflation here in the UK. 

It’s important to note that there are some annuities, like inflation-protected annuities, that guarantee to rise annually in line with the cost of living. The sacrifice you make is that these annuities could pay out a lower amount at the outset than some alternatives. 

It’s also worth considering your health and other financial circumstances before deciding to take up the option of an inflation-protected annuity. So, speak with a professional financial planner to discuss your options and identify exactly what you need to fund your retirement. 

Get in touch

If you’re approaching or at retirement and you’d like to explore your retirement income options, we can help.

Please get in touch via email at enquiries@hda-ifa.co.uk or call 01242 514563.

Please note

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