Busting five common annuity myths

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Annuities have enjoyed a rise in popularity recently, but there are still some misconceptions about them. We bust five myths about annuities to help you better understand whether this retirement option could be right for you.

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In research from Standard Life, part of Phoenix Group, 2,000 over-50s were asked about annuities – and the results show that people can misunderstand how they work. 

Before we kick things off, let’s take a quick look at what annuities are. An annuity is something that you can buy with money in your pension pot. It then gives you a guaranteed income for the rest of your life – meaning it can be a way to fund your lifestyle once you retire. 

Now that’s out the way, let the myth-busting begin!

MYTH 1: Annuities don’t provide good value for money

If you’re buying an annuity, the amount of income you can get depends on what’s known as an ‘annuity rate’. The higher the rate, the more income you could get in return for your pension savings.

Some people may believe that annuities aren’t worth what you pay for them. But rates have risen and are now at their highest levels in 14 years. And don’t forget, the annuity rates you’re offered will depend on your circumstances. If you have a medical condition or are in poor health, for example, you could find your income from an annuity is higher.  

Remember, annuities can pay out for the rest of your life (and potentially beyond, as you’ll see in a moment), or for an agreed period of time. You can also tailor your annuity in different ways. For example, you can get annuities that rise each year, meaning you’re less likely to feel the effects of inflation. 

MYTH 2: You need to use your entire pension pot

13% of people in our research believe they need to use all the money in their pension pot to buy an annuity. But this isn’t the case. You could use all of your pension pot if you wanted to – or you might just choose to use some of it.

Let’s say you have a pension pot of £500,000. You might decide to take 25% of this as your tax-free lump sum, leaving you with £375,000. If you don’t want to empty your pot, you might then choose to only use £300,000 of your pension money to buy an annuity and keep the remainder in pension drawdown. 

MYTH 3: An annuity doesn’t let you to pass your pension savings onto to loved ones

Your annuity doesn’t have to stop when you die – although only 37% of people in our research knew that you could set an up an annuity that covers the life of a surviving partner. 

There are various ways to tailor an annuity so that it can provide for your loved ones after you die. For example, you could opt for “value protection”. This means that the amount you purchased your annuity for is paid out as a lump sum to your beneficiaries when you die (minus what’s already been paid to you as income). 

Or you could go for a “guaranteed period”. This is when you choose a period of time for your annuity income to be paid out for. And if you die before then, the income is paid out to your beneficiaries. 

It’s worth thinking about who you’d want your money to go to, like a partner or children. You can then think about whether you’d want to tailor an annuity so that it provides the right death benefits to suit your needs.

MYTH 4: Annuities need to be bought at the time you retire

24% of people in our research believe you need to buy an annuity at the point of your retirement. But this isn’t the case. You can normally buy an annuity at any time from the age of 55 (rising to 57 on 6 April 2028). So you could be well into your retirement by the time you decide to buy one. In fact, the older you are, the more income you’re likely to get from your annuity, as it’ll likely be paid out over a shorter time than if you’d purchased it earlier. 

MYTH 5: If you buy an annuity, you can’t opt for drawdown

Just over a third (35%) of people knew that you can use an annuity alongside other retirement options, like pension drawdown. But you can indeed take your money in more than one way.

You might decide to convert some of your pot into an annuity and then take the remaining money via drawdown, for example. With drawdown, you can choose how much you take from your plan, and you can start, stop or change the payments that are made to you at any time. So you’d still get a guaranteed income from your annuity, but you’d also have some flexibility with the money still sitting in your pension plan. 

Over time, if you decide that you prefer having a guaranteed income, you could still have the option of converting the remaining money in your plan into an annuity. 

The information here is based on our understanding in October 2023 and shouldn’t be taken as financial advice.

A pension is an investment, the value can go down as well as up and you could get back less than you paid in.