After the financial crisis, the Bank of England slashed interest rates almost to zero, destroying the returns on annuities.
Previously, a pensioner with £100,000 in retirement savings could buy a lifetime annuity income of around £9,000 a year.
Suddenly, they were lucky to get £4,500. If they wanted a joint life annuity to pay ongoing income to a surviving partner, they’d barely scrape £4,000.
And if they wanted inflation protection, they’d get as little as £3,000 in year one, although that would rise over time.
That’s a dismal return from a lifetime of saving so no wonder pensioners hated annuities. When former Chancellor George Osborne dropped the duty to buy them as part of his pension freedom reforms in 2015, sales went through the floor.
So did the number of providers. Today, only Aviva, Canada Life, Just Group, Legal & General and Scottish Widows sell annuities.
Most pensioners now leave their retirement savings invested while taking income and lump sums as required, via drawdown. This is much more flexible and allows them to benefit from stock market growth.
Then 18 months ago, everything changed. Annuity rates started to climb as interest rates recovered and pensioners are busily buying them again.
As stock markets crash and flounder, drawdown savers are now the ones worried.
Many risks depleting their pension pots before they die, as they are forced to make additional withdrawals due to the cost of living crisis.
Sales of annuities surged 22 percent to £1.2billion in the first three months of this year, according to the Association of British Insurers.
Annuity rates are strongly linked to interest rates, the ABI said, and the sharp rise in sales reflects the higher income they now pay.
A healthy 65-year-old with £100,000 of pension can now buy a single life level annuity paying income of £6,842 a year, latest Hargreaves Lansdown figures show.
That’s lower than before the financial crisis but it’s an increase of more than 50 percent from recent lows.
A smoker could get even higher income of £7,619. Their lower life expectancy means the annuity company shouldn’t have to pay out for as long.
Growing numbers are now buying escalating annuities, where the income increases every year to combat inflation.
A healthy 65-year-old would get a starting income of just £4,860 a year from a single life escalating annuity, but that would rise steadily year after year.
So which should you choose?
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There are pros and cons to both.
Drawdown is more flexible as you can get at your capital at any time. This can be risky if you take too much, though.
The value of drawdown savings will steadily grow when the stock market is climbing. But if asset prices fall, as they have lately, pension pots shrink.
Annuities offer a guaranteed income for life. That’s great if you live for a long, long time, not so good if you die a few years after taking one out. Although as I wrote recently, it’s possible to get round this with a short-term annuity.
Choosing between an annuity and drawdown is tricky, and financial advice may be required. Or you could talk to the government-backed Pension Wise service for free.
Crucially, it doesn’t have to be an all-or-nothing decision.
Pensioners could buy an annuity with some of their pot, and leave the rest invested in drawdown. That could provide the ideal combination of fixed, guaranteed income for life, plus the flexibility and potential growth of drawdown.
It’s complicated, but at least pensioners have a choice. For years, the only way was drawdown. Annuities are back and it’s a welcome return.
