State pensioners are not limited to relying solely on the Department for Work and Pensions (DWP) state pension, as an additional £9,877 per year is available through annuities. Annuities have seen a resurgence in popularity thanks to better rates, offering a guaranteed income for life.
Annuities Regain Popularity
After a decline following the 5 pension freedoms in 2015, which gave people more choices with their pension savings, annuities are back in favour. An annuity provides a guaranteed income for life and can continue to pay a partner or beneficiary if this option is selected at the outset. The “annuity rate” indicates the guaranteed annual income you receive when purchasing an annuity.
David Little, financial planning partner at wealth management firm Evelyn Partners, notes that with annuities regaining popularity, more providers are entering the marketplace. “Shopping around is key – the difference in income between providers can be huge,” he advises.
Timing and Alternatives
Rachel Vahey, head of public policy for AJ Bell, suggests considering the timing of buying an annuity. “So, if you don’t need the money immediately, you may want to think about the timing of buying an annuity, perhaps leaving it for later when you are older or when market conditions have changed,” she says. She also highlights that some may prefer to keep their money invested to benefit from stock market growth. “For these people, drawdown might be a better solution allowing them to keep their money invested whilst still taking an income or a lump sum when they need it. Remember, an annuity only pays an income, you can’t take a lump sum from it when you need to,” Vahey adds.
Average Annuity Payout
According to SharingPensions.co.uk, state pensioners can receive an average of £9,877 per year from an annuity, based on current rates and assuming a pension pot of £133,000 before tax. While the first 25% of your pension pot can be taken tax-free, additional withdrawals are subject to income tax, and you may need to consider the impact on eligibility for state benefits or care services.
