Annuity sales up, but most over-50s don't even consider them

Sales of annuities -- which provide a guaranteed income for life -- are on the increase. But many people still don't consider them when planning their retirement finances.

In the first three months of 2023 annuity sales rose by 22% compared with the prior quarter, according to the latest data from the Association of British Insurers.

Between January and March 2023, people bought 16,256 annuities. This is the largest quarterly number recorded since 17,252 were sold between July and September 2019.

Annuity rates are strongly linked to interest rates, and this surge in sales reflects the increase in interest rates seen over the past few months, the industry body said.

With concerns about price rises eroding the value of pension savings, customers are also turning in greater numbers to products that protect them from inflation. Sales of escalating annuities (which provide an income that increases every year) grew by 23% in the first quarter.

Annuity break-even point falls

The improvement in annuity rates has bought forward the break-even point to get your money back on your original investment by five years, says Canada Life.

Today, a benchmark £100,000 annuity for someone aged 65, with no pre-existing health or lifestyle conditions, would pay in the region of 6.9%. This would generate an income of around £6,907 a year, with a payback period of 14 and a half years.

By comparison, the same annuity would pay an income of £5,240 five years ago, with a break-even point of 19 years, and an income of £5,670 a year ago, with a pay-back period of 18 years.

Majority of over-50s not considering annuities

However, a survey by the Financial Services Compensation Scheme (FSCS) found that fewer than two-thirds (64%) of over-50s have heard of annuities and just 15% have a good understanding of how they work.

Risk appetite amongst UK adults aged 50+ is low, with only one in 10 (10%) saying they are willing to take risks with their money.

Yet less than one-third (28%) of UK adults aged 50+ either have an annuity or would consider buying one. With 26.5 million people aged 50+ across the UK, this means that around 19 million people may be overlooking a pension option that is FSCS protected and offers a guaranteed regular retirement income.

What's more, despite the significant increase in annuity rates, only two in 10 said improved rates made them more likely to buy one.

'Pros and cons'

"It is not surprising that most UK adults aged 50+ are risk averse when it comes to their money. At this stage of people's lives, they are likely to choose safety and stability over volatility and uncertainty," said Lila Pleban, chief communications officer at FSCS. "However, what is surprising is that many people are not willing to even consider an annuity because they don't fully understand what it is."

It's important to get advice to help understand the pension choices available to you, Pleban added.

"There are pros and cons to every option out there for your pension pot, whether you choose a guaranteed income or a more flexible drawdown approach, and retirement choices are very personal."