Annuities used to be the default product for retirees. But that changed in 2015 when pension freedoms were introduced, which allow people aged over 55 to access their pension pot in any way they like, and income drawdown, where you leave most of your pension invested and withdraw income, has become the norm.
Annuities allow you to trade in your pension pot for a guaranteed income for life. You can choose between a stable income, an income that rises with inflation, or an income that increases at a fixed rate.
Since 2015 the number of people buying annuities has dropped sharply – with twice as many pension pots being used for income drawdown than annuities, according to the Financial Conduct Authority (FCA). Annuities’ popularity has been hurt by the paltry income rates they pay as well as growing demand for flexible retirement options. Annuity income has been pushed down by low interest rates and depressed government bond yields, which are used to calculate how much you receive. They are also seen as the opposite ideology to pension freedoms, being entirely inflexible. Once you spend your pension pot on an annuity, you cannot later change your mind.