13 Aug 2025
Combining an annuity with flexible pension withdrawals allows savers to secure a guaranteed income in retirement, without sacrificing flexibility and returns potential. Lumin Wealth’s Managing Director, Martin Cotter, explains more…
Higher interest rates and pending changes to pension taxation have made annuities more appealing, but savers remain concerned about a lack of flexibility.
A blended approach – allocating a portion of pension funds to an annuity for guaranteed income, while keeping the rest invested – can offer a balanced solution.
The case for annuities
Annuity rates have risen materially from the low levels seen between 2016 to 2021. This has made them more appealing for retirees who wish to benefit from the safety net of a guaranteed income.
Meanwhile, a drawdown pension is typically invested in a mix of stocks, bonds and other assets. The overall investment value will go up and down, which can affect the level of income from it.
Annuities may also see greater interest on the back of unused pension assets forming part of the estate from April 2027.
A key potential drawback of an annuity is losing an income stream upon death, unless appropriate protections or guarantees are in place. These guarantees can be ‘expensive’, in that they reduce the amount of annual income you will receive.
A blended solution?
An annuity provides a guaranteed income, but lacks flexibility. Once purchased, it can’t be changed.
Additionally, opting for an annuity may mean missing out on years of potential investment growth. A blended approach could be considered instead.
Savers could withdraw tax-free cash up front, allocate part of the remaining pension to an annuity for a guaranteed income (for life or a set period), and keep the rest invested within a pension. This provides a secure annual income, while allowing for long-term growth potential.
Drawdown vs. annuity comparison
It’s essential to compare the income potential of each strategy. In the example illustration if the couple were to live until the age of 85 (in line with average life expectancy) they would get more for their money via drawdown, assuming a conservative real return of 2% annually.
If the couple were to live until they were 100, an annuity would be more lucrative. Investment return assumptions can vary and change the picture. A two-pronged solution that allows you to tap into the benefits of both an annuity and flexible drawdown could be a valid choice in today’s market.
If you would like to discuss your options for your overall financial plan, please call 03300 564 446 or get in touch via our contact form.
