Retirees with a guaranteed income report higher levels of satisfaction and face fewer affordability challenges, according to a new study from Legal & General and the Happiness Research Institute, an independent Danish think tank focusing on wellbeing, happiness and quality of life.
The research, which explored the lives and finances of 3,000 UK retirees, looked at the connection between financial security and wellbeing in retirement, and the link between annuities and happiness. The study found that retirees with an annuity score more positively across multiple wellbeing measures than those that don’t. They report greater satisfaction with their current lives, relationships, free time and social activities. They are also 51% more likely to report lower levels of stress than those without one.
The advantages for annuity holders go beyond just wellbeing considerations and include benefits around managing finances in retirement. Annuity-holders are more likely to report the highest level of financial confidence compared to those without one (24% versus 21%). Even when the data was controlled across income levels, those with an annuity were 27% more likely to find their finances predictable and easy to keep track of. When examining reported affordability challenges, they were also 40% more likely to consistently afford their credit card payments or loans compared to those without one.
Despite these benefits, many retirees continue to overlook annuities as a valuable financial tool. The latest FCA Retirement Income Market Data shows that, despite a recent increase in annuity sales, only 10% of pension pots accessed for the first time in 2023/24 were used to purchase an annuity.
Advice is a key driver in choosing a guaranteed income
When it comes to what drives people to choose an annuity, advice plays a crucial role. A recommendation from a financial adviser is the top reason people opt for an annuity (31%), underlining the importance of advice and guidance in the retirement planning process. The draw of receiving regular payments and the assurance of a stable income that lasts a lifetime are also key factors, with 23% saying these benefits are important. Additionally, 16% opted for an annuity to make budgeting easier, while 13% wanted greater control over their finances. Retirees are also looking to use annuities as part of a blended retirement, understanding the importance of choosing retirement products that are right for each individual’s circumstances.
*assuming 3.50% salary growth per year, and 5% a year investment growth. Figures allow for 2% inflation. Annual Management Charge of 0.75% assumed. The figures are an illustration and are not guaranteed. Earning limits not applied.
Lorna Shah, Managing Director, Legal & General Retail Retirement comments: “Too often, conversations around the value of an annuity are limited to rates. However, our findings reveal a clear ‘happiness advantage’ for those with annuities. The stability of a guaranteed income gives retirees peace of mind that their money won’t run out, even if they live past 100. It takes the guesswork out of budgeting and lets people focus on enjoying retirement, rather than spending time worrying about their finances. While the benefits of an annuity can often be overlooked when it comes to retirement planning, it’s important to note they don’t have to be the only solution as they can be part of a blended approach. Combining the guaranteed income of an annuity with other sources, such as income from investments or drawdown, can provide even more flexibility, ensuring that essential expenses are covered, while offering the freedom to grow other assets”.
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