Annuity rates rise but alternative retirement income options remain popular

Retirees looking for a secure retirement income will be pleased to see that the average annuity income has increased year-on-year, but with average incomes still lower than they were in 2019, those entering retirement may want to consider alternative retirement income options.

Research carried out by Moneyfactscompare.co.uk found that the average annual annuity income in May 2021 was £2,357, this is an increase from the previous year when, in May 2020, the average income was £2,271. Two years ago, however, the average annuity income was £2,516, meaning that those retiring this year and who take out an annuity, will be £159 worse off each year than those retiring in May 2019.

This, combined with low saving rates, means that many workers nearing retirement are financially facing a challenging retirement, as Rachel Springall, finance expert at Moneyfactscompare.co.uk, explained: “Building a comfortable retirement pot may feel out of reach for some, particularly when interest rates sit at record lows and inflation is predicted to rise, leading to an erosion of the true spending power of retirees’ savings pots that supplement their pension provisions. Annuity income has failed to return to levels seen before the pandemic, which means consumers considering this option will be getting less yearly income than they may have expected. Retirees may well be facing a pensions shortfall and their savings are not working as hard as they could.”

Many workers who are nearing retirement are considering working for longer to boost their retirement income. Springall said: “A staggering two-thirds (67%) of 18-23-year-olds said they planned to delay their retirement by two years on average, according to a survey conducted in March 2021 from PensionBee, and one in three (35%) 41-54-year-olds planned to delay by 16 months. Delaying retirement should not be taken lightly, but this decision may well be to enable someone to have more time to build a larger pot, perhaps even continuing to work in some form.”

Another option available to homeowners is to release equity they have built up in their home through equity release. Over the last few years equity release rates have been falling, while the choice of plans available have increased significantly. This has given those considering equity release more options that has enable them to choose a plan that provides flexibility to suit their financial needs, such as the ability to repay interest or make partial repayments. Despite this increase in flexibility equity release has a long-term impact on finances so those considering this option should speak to an independent financial advisor first to ensure it is the right option for their situation.

Alternatively, retirees may not want to take an annuity at all and instead withdraw money from pension pots through pension drawdown. After the Pension Freedom Act was introduced in 2015 an increasing number of retirees have been opting to withdraw money from their pensions, but while this is a good option for many retirees those choosing to withdraw money from their pensions should be aware of the risks in doing so, such as running out of money during their retirement.

“The amount of pension funds withdrawn through the pension freedoms rose during the first three months of 2021 and while many may have carefully considered doing so, it’s still good to see the Financial Conduct Authority (FCA) proposing rules to get pension providers to refer retirees – who are seeking to access their pension pot – to Pension Wise, the Government-backed guidance site,” explained Springall. “It is vital consumers are made aware of the financial impact that accessing their retirement fund can have and whether there is an alternative. However, it is also important retirees seek advice during the earlier stages of their retirement planning to avoid rash decisions later.”