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Unlocking financial freedom with annuities

 

“Knowing that you have a guaranteed income for life can significantly reduce financial anxiety. This peace of mind allows retirees to focus on enjoying their retirement years rather than worrying about their financial future.”

Carolyn Jones
Retirement Director
Published on: 09 May 2025
3 min read

We all know that the financial world can be unpredictable, and this is especially true against the backdrop of today’s ever-changing political landscape. Given this, it’s only natural that people are looking for ways to secure a stable income for their golden years. 

That’s where annuities can help. They offer a guaranteed income for life which can in turn bring a lot of peace of mind, and an increase in financial resilience. 

So, let’s dive into the benefits of annuities and how they can fit into a long-term financial strategy.

What are annuities?

Firstly, what exactly are annuities? Simply put, annuities are financial products designed to convert a lump sum into regular payments, typically for the rest of a person’s life. They can be customised to continue paying an income to a dependent after death, or to pay a lump sum if the person dies within the first five, or 10 years of their retirement. 

It’s also worth mentioning that some annuities also include inflation protection too. Of course, at the same time, no financial product is perfect, and annuities do have some drawbacks –inflexibility being one. Once a person takes out a lifetime annuity, they usually can’t make any changes. 

Plus, annuity income is also taxable, so it’s essential that those looking to take out an annuity seek advice from a financial advisor to ensure that the solution they choose aligns with their financial goals before making a decision.

 

"Annuities are financial products designed to convert a lump sum into regular payments, typically for the rest of a person’s life."

A guaranteed income for financial resilience

Recent events have shown that the world is an increasingly unpredictable place. And while retirees tend to have less appetite for risk, stock markets are increasingly volatile nonetheless.

A primary advantage of annuities is the guaranteed income they provide. Unlike investments that fluctuate with market conditions, annuities deliver a predictable and stable income which supports financial resilience by ensuring a consistent cash flow to cover living expenses regardless of economic fluctuations. 

Can annuities protect against inflation?

Inflation erodes the purchasing power of savings over time. Most annuities offer an inflation protection option, ensuring that income payments increase over time to keep pace with inflation.

Protecting dependants

When couples retire together, it doesn’t automatically mean one partner gets a share of the other’s pension pot if they die. 

The Scottish Widows Retirement Report has shown that men tend to have larger pension pots, be older and die earlier than their partners. This means that the less affluent partner, usually women, often face a significant reduction in retirement income when their partner dies. 

With 85% of annuities purchased on a single life basis, the default must shift to joint life annuities, ensuring that women are not left financially vulnerable in their later years. However, the good thing is that better financial education with ongoing support such as the new Scottish Widows Retirement Tool can help to bridge this gap. 

Comparing retirement income options

Drawdown plans allow retirees to withdraw funds from their invested pension pot as needed, providing flexibility but also exposing them to market risks, longevity risk and sequencing risk. 

Longevity risk, for example, has the possibility of a retiree outliving their savings. As medical advancements continue to improve life expectancy, the risk of outliving your savings is worrying. Annuities address this by offering lifetime income, irrespective of lifespan. 

And as I say, although investment portfolios can offer growth potential they also come with the uncertainty of market fluctuations too. Combining annuities and drawdown, however, can give a more rounded and complete solution to this problem.

The FCA Thematic Review of Retirement Income highlighted that a sensible start point would be to ensure that essential expenditure is covered by secure income, be that State Pension, a defined benefits pension scheme or annuity income. The retiree will then in turn have more flexibility to invest and draw from their remaining invested pension pot.  

Integrating annuities into a diversified retirement plan 

A secure financial foundation can give the peace of mind that is a vital component of financial resilience, contributing to overall well-being and quality of life and allowing retirees to focus on enjoying their retirement years rather than worrying about their financial future. 

Looking ahead

So, incorporating annuities into a diversified retirement plan can enhance financial resilience. The psychological benefits of a guaranteed income for life should not be underestimated. 

Indeed, a plethora of benefits such as guaranteed payments, protection against longevity risk, protection for dependants and potential for inflation adjustment make them an attractive option for retirees. By integrating annuities into a financial strategy, retirees can enjoy the peace of mind that comes with a secure income, leaving more time for them to enjoy their retirement years.

Pensions

 

Carolyn Jones
About the author Carolyn Jones

Carolyn joined the Group in February 2023 as Retirement Director and Platform lead. She is passionate about helping people understand their money and pensions and designing services to support people with their financial wellbeing as each stage of their life.

Carolyn has spent over 30 years working in the pension industry. She started her career with an actuarial company and realising the actuarial life was not for her moved into change management and strategy in pensions with roles at British Airways and PwC. This was followed by 13 years at Fidelity International, where she was responsible for the development of pension and retirement services and for defining Fidelity's retirement thought leadership, to provide insight into the ever more complex issues which customers face in saving for and living in retirement. As well as being executive director. 

Prior to joining the Group, Carolyn spent three years at the Money and Pensions Service as Head of Pension and Money Guidance strategy, working with government to define the strategy for how MaPS should help citizens with their money and pensions.

Follow Carolyn on LinkedIn.

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