Buying Annuities: Who are they right for?

09 Aug 2023

We are in the reporting season for insurers to tell us how many of their products advisers sold in the first half of 2023. One of the first to report was Just, which announced individual annuity sales were 54% up at over £470 million. Just’s numbers are especially relevant as it sells mostly through advisers and does not have a back book of existing pension savers who can function as a flywheel – keeping sales flowing in whatever the conditions.

The cumulative effects of Brexit, war in Ukraine, former prime minister Liz Truss and the cost of living crisis have pushed up long-term interest rates, in turn improving annuity incomes.

A 65-year-old retiree can now get an annuity yielding around 7% of their pension pot. While many will agree that’s attractive, we still need to ask the question, ‘who is the right sort of person to buy annuities?’.

Buying Annuities: The right client

Pot Size	Annuity Value	Recommendation	Rationale
<£25,000	Up to £30 per week	Cash it in	At only 15% of the state pension, this figure is too small to make a difference to regular living costs. Put it away in the building society as a rainy day fund.
£25,000 - £100,000	Up to £130 per week	Level Annuity	This is a good income, and the annuity will boost living standards throughout retirement. Level is OK here as the state pension now provides £200 per week and rises at least with inflation each year.
£100,000 - £250,000	Up to £330 per week	Mix and match some annuity with some income drawdown	With state pension smaller than the private pension, inflation protection is important. But increasing annuities are very expensive, so it’s better to mix a level annuity with an income drawdown plan holding growth assets.
£250,000 - £1,000,000	Up to £1,300 per week	Sophisticated blending of annuity and drawdown	There are excellent tools available that enable an adviser to ‘mix and match’ annuity and drawdown in a way that accurately reflects the client’s risk profile. Adjust the blending over time as the client ages.
£1,000,000 - £5,000,000	Up to £6,000 per week	Income drawdown	The super-wealthy can self-insure against living too long. Planning for inheritance and getting the money out of the pension at a bearable tax rate are the key considerations for this group.

Finding the right client for an annuity is not easy. The size of their pension pot, or combined pots, needs to be not too small, not too large but just right. As ever, the value of a financial adviser is that they can tailor a rule of thumb like my table above to fit the actual needs of a particular client.

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