Are annuities safe?

Annuities are a type of insurance policy that can be bought with a lump sum to provide a regular income. In the UK, lifetime annuities are the most common type of pension annuity. Pension lifetime annuities can be purchased using some or all your pension pot and can provide you with a regular, guaranteed income for the rest of your life. But are annuities safe? Read on to find out.

Once a lifetime annuity has been purchased and is in payment, it will be payable for the rest of your life, no matter how long you live. This makes lifetime annuities a safe option as the provider is guaranteeing to pay you a regular income for life. The alternative, pension drawdown, requires you to actively manage your pension pot and if your investments are managed incorrectly or the market drops, this could result in you having insufficient funds to sustain your desired lifestyle throughout retirement.

Can you lose money in an annuity?

Annuity providers calculate annuity rates by considering a range of factors, including the size of your pension pot, your age, and your health to name a few. To find out more about how annuity rates are calculated see our guide ‘How are annuity rates calculated?’. As your life expectancy is linked to your annuity payments, there is a possibility that you won’t reap all the potential benefits from your annuity purchase. This is because annuities are essentially the opposite of life insurance. With life insurance you are effectively anticipating whether you will die before the insurance company expects you to. And if you do, the life insurance company pays out. Conversely, with a lifetime annuity you are making the opposite assumption. If you die earlier than the annuity provider has estimated, they may keep the rest of the annuitized funds.

If you would prefer to protect these funds, you can choose to add a guarantee period, which will ensure annuity payments are made for a specific length of time. This means your annuity income will continue to be paid to your beneficiaries or estate after your death for the remainder of that period. To find out more about guarantee periods take a look at the answer to the question, ‘What is a guarantee period (also known as minimum guarantee payment period)?’ in our ‘Frequently asked questions’.

Alternatively, you could choose to add value protection which will protect all or part of the pension fund used to purchase your pension annuity. Value protection can return a lump sum to your beneficiaries or estate if you (or if selected, both you and the second annuitant) die without having received the pre-selected protected portion of your original pension pot less any income already received. To find out more about value protection take a look at our ‘Frequently asked questions’ and view the answers to the questions ‘What is value protection?’, ‘How does value protection work?’ and ‘What does value protection cost?’.

Do annuities keep up with inflation?

When purchasing a pension lifetime annuity, you may be worried that inflation will be higher than expected and in future your annuity income will be worth less than you anticipated. To mitigate this risk and protect your income against the rising cost of living, you could choose to have an escalating income where your annuity income increases annually. You could select either a fixed increase up to 10%, an increase in line with the Retail Price Index, or a variable amount up to the lower of 5% or the Retail Price Index (also known as the Limited Price Index). To learn more about escalating income (also known as escalating annuities) have a look at our guide, ‘What are the different types of annuity?’.

Adding value protection or a guarantee period to your annuity or selecting an escalating annuity will lower your annuity income. However, they may help you feel safer in your decision and some options may have a lower impact on your income than you might expect.

Are annuities safe in a recession or market crash?

Once the cancellation period ends and your pension annuity has started, your lifetime annuity rate will be fixed for life (unless you choose an escalating annuity). This means your annuity income will not be subject to stock market volatility and your funds will not be affected should there be a recession or stock market crash.

What happens if my annuity provider goes bust?

Should your annuity provider go bust, your annuity would be safe as the Financial Services Compensation Scheme would move your policy to another company or offer you compensation for up to 100% of the value of your pot at the time the provider was unable to pay you. This compensation would take into account the remaining value of your annuity including any death benefits that were added.

Can I change my annuity?

When purchasing a lifetime annuity, you have a 30-day cancellation notice period. After this, you can’t change your mind or make changes to your annuity. It is therefore crucial that you understand your options and how they would affect your income, so you can make an informed decision and ultimately decide if you think a guaranteed lifetime annuity is the safest option for you and the right choice for your circumstances. You may therefore wish to seek advice. Find out more in our ‘Do I need to seek advice before I buy an annuity?’ guide.

If you'd like to compare pension lifetime annuity rates and see how the different options would affect your income, all you need to do is complete one online form and we can help you compare guaranteed quotes from all providers in the annuity open market.