Annuity Income Reverses Three-Year Decline | moneyfacts.co.uk

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Rachel Springall

Rachel Springall

Finance Expert & Press Officer
Published: 18/01/2022

Pensioners may be pleased to see average annuity income increased for 2021, marking a reversal after three years of falls.

According to the latest analysis by Moneyfacts.co.uk, average annual annuity income was 3.9% last year, compared to -6.3% in 2020 and -8.5% in 2019.

The analysis also found that pension fund growth almost doubled between 2020 and 2021, from 4.9% to 9.5%. This is still lower than the 14.4% average growth seen in 2019, but will be welcome news for retirees as the cost of living rises.

Official data from HMRC shows that pensioners are taking advantage of the pension freedoms introduced in 2015, withdrawing £2.6 billion from their pension pots during the first quarter of 2021. Pensioners have taken a total of around £45 billion in flexible withdrawals since pension rules were relaxed.

Pre-2015, people were required to buy an annuity despite the poor rates on offer, so the market shrunk rapidly after the government introduced pension freedoms and consumers could turn their backs on these poor value products. Since then, however, some pensioners have found there is a place for annuities in their retirement planning strategy.

With the ability to make flexible withdrawals from pensions since the rules changed, people may have been taking money out of their pensions to give to family as an early inheritance, as well as to fund a retirement gap, suggested Rachel Springall, finance expert at Moneyfacts.co.uk. Aside from dipping into their pension pots, homeowners could consider equity release to free up some funds, although this requires careful consideration, discussion with family, and professional financial advice.

Regardless of their financial situation, pensioners will be pleased to see some positive growth in annuity income and pension funds to smooth their path in retirement.

“Retirees concerned about their retirement pot may breathe a sigh of relief to see both the average pension fund and annuity growth was positive in 2021,” said Springall. “The volatility of pension funds in 2020 was evident, with a fall from a positive return of 14.4% in 2019 down to 4.9%. Consumers will now see 2021 returned a positive 9.5% average growth, although this will vary by individual fund.

“This is an encouraging sign that those looking to retire this year may have more in their pension pot to either take out an annuity or opt for drawdown. If they decide to annuitise all or part of their pension they will also find annuity income is up from last year too, providing them with a welcome income boost compared with those who retired in 2020.”

Those planning ahead for retirement but looking at a potential shortfall in funding could consider putting more into their pension now, or opening a Lifetime ISA to benefit from a 25% government bonus on their savings. Whichever option you choose, getting retirement projections sooner rather than later is sensible, Springall advises, to give you the full picture and enough time to save.

Moneyfacts’ calculation for annuity income is based on someone aged 65 buying a single life level without guarantee annuity for a purchase price of £10,000.

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