Fewer people are buying an annuity with their pension savings

How will you access your pension savings?

In the past, savers almost always had to buy an annuity with their pension pot. Since the pension freedoms were introduced in 2015, there is more choice in how and when you can access your money.

You can use some or all of your pension pot to buy an annuity; withdraw some or all of it as a cash lump sum; or take an income from your pension pot, leaving the rest invested.

With more options on the table, fewer people are purchasing annuities, according to new research by the Pensions Policy Institute (PPI).

The research organisation found that the number of annuities purchased fell from 189,000 in 2014 to just 49,000 in 2019. At the same time, drawdown increased from 46,000 transactions in 2014 to a peak of 116,000 in 2019.

However, opting for an annuity will still be right for many people and a financial adviser can help you weigh up the options.

What is an annuity?

An annuity is an insurance product that converts your defined contribution pension savings into an annual pension, giving you a guaranteed income for the rest of your life.

How much you get depends on how much you have saved and the rate the annuity provider offers.

Some people are eligible for an enhanced annuity. In other words, if you have certain health or lifestyle conditions you may be offered a higher rate than someone who is likely to live for many years.

Figures from the Financial Conduct Authority suggest that between 39% and 48% of people who bought a standard annuity from their current pension provider in 2016 may have had qualifying health or lifestyle conditions which would have made them eligible for an enhanced annuity.

Why shop around?

As consumer group Which? explains, annuities come in all shapes and sizes, but it's vital that you pick the right one -- because once you buy, you can't change your mind.

You don't have to buy an annuity from your pension provider. Shopping around could increase your income and financial security throughout your retirement.

PPI's research, supported by Canada Life and Retirement Line, showed that an individual could gain an extra £7,000 per £100,000 in their pension pot over the course of their retirement by shopping around.

In 2019 alone, up to £130m could have been 'lost' in annuity income from people failing to shop around for the best deal.

"The annuity market is worth £4bn annually, and yet customers are not getting the most value from their pensions due to inertia or simply not understanding the importance of shopping around," commented Nick Flynn, director of retirement income at Canada Life.

"Despite the introduction of pension freedoms and information prompts, the situation appears to be getting worse. People don't know what they don't know, and it isn't simply about securing the best deal, it is equally important to buy the right shape annuity. Without professional assistance or advice, this is at best difficult.

"The PPI is right to shine the spotlight back on the market and start a debate. Just as the furlough scheme winds up, many thousands of over-55s will be considering their working futures. Many may find it hard to return to the workplace and seek the security of replacing their salary in retirement. An annuity is the only guarantee in town, so it's important anyone considering their retirement options seeks guidance and advice to make the right decisions for their circumstances."