At one time, annuities were the go-to option for those planning their retirement income, but thanks to the pension freedoms, those days are long gone. Now, annuities feature well down the list of income options for many pre-retirees, as many crave the flexibility of investments and drawdown. But is an annuity still worth considering?
According to new figures from CoreData Research, just 22% of savers plan to buy an annuity to fund their retirement, well below most other options given. Indeed, the most popular way pre-retirees plan to generate an income in retirement is through the state pension, cited by 67% of respondents, followed by personal savings vehicles such as cash ISAs, current accounts and savings accounts (40%).
A further 34% plan to continue working, either in part-time work or self-employment, while 30% will look to income drawdown. Another 29% will use their property to provide an income, such as through equity release, downsizing or investing in buy-to-let, while 28% will use other personal investments such as stocks & shares ISAs. Only then do we get to buying an annuity (22%), which only beats the Lifetime ISA
(13%) and contributions from children (1%), with the remaining 15% not yet sure how they'll secure an income.
"It is interesting that personal savings including cash ISAs rank higher than both income drawdown and annuities, while personal investments including stocks & shares ISAs are also considered above annuities," said Craig Phillips, head of International at CoreData Research. "This indicates traditional retirement income products are being usurped by other tax-efficient savings and investment vehicles."
This trend could be further strengthened now that the ISA allowance has risen to £20,000, noted Craig, as more people seek to maximise their tax-efficiency – but it's important to choose wisely. "ISAs can present a good option for people looking to generate retirement income because income taken from them is tax-free," said Craig, "but with cash ISAs currently offering very poor rates, stocks & shares ISAs are likely to be a more attractive option for those willing to accept some investment risk."
Stocks & shares ISAs are undoubtedly a popular choice for generating an income stream these days, but it's important to point out that, even though annuities are declining in popularity, they have one key advantage over other forms of investing – the income you receive from them is guaranteed for life, which can't be said with anything else.
This is why those 22% of respondents are probably wise to still consider such a purchase, and why more retirees should perhaps be thinking about going down this route. After all, there's nothing to stop you from having several income streams in your later years – even if you take advantage of the pension freedoms, you could release some cash from your pot to buy an annuity while keeping the rest invested in drawdown, for example, of even in stocks & shares, giving you the potential for further investment growth while still ensuring that a portion of your income is guaranteed.
This mix and match approach could be well worth considering, but with a number of providers having pulled out of the annuity market since the pension freedoms, it's more important than ever to make sure you get the advice you need. That's why you should never go it alone – contact our no obligation annuity planning service for free, impartial advice that can help you compare the open market options, and see if an annuity could still be worth your while.
Find out more about how to choose the best annuity by reading our guide
Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.