Half of people over 55 are worried about running out of money: should you consider an annuity?

Half of people aged over the age of 55 are worried that their retirement savings won't last their lifetime, according to a new survey. 

The prospect of being left short of money in retirement is a major concern to a very large group of pension savers. 

Here, Which? explains what you can do to get some peace of mind and outline how much you might need for a comfortable retirement. 

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Running out of money in retirement

Research by the behavioural finance experts Oxford Risk found that 51% of over-55s are worried about running out of money in later life. 

Just 27% of respondents to its survey said they weren't concerned about draining their funds in retirement, while the remainder said they ‘didn’t know’.

The study also discovered that 86% of over-55s believe that it's important to have additional sources of income to fund their desired retirement alongside the state pension.

Oxford Risk’s findings were based on a study among 1,011 UK adults over the age of 55. 

Should you consider an annuity?

Assuming that you don’t have money from a final salary or career average pension scheme, one way to ensure you don’t completely deplete your retirement savings is to arrange an annuity. 

Buying an annuity involves swapping some or all of your pension savings for a guaranteed income for the rest of your life.

Once you've bought an annuity you can't reverse the process, so it's important to take the time to choose the right option for you.  

The exact amount you'll receive from an annuity in return for your pension savings depends on the rate a provider offers you. 

When pricing annuities, providers consider the broader economic picture and your personal circumstances (for example, your age, location and health).

If you take out an annuity as a result of using the service from HUB Financial Solutions, Which? will earn a commission to help fund our not-for-profit mission. 

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How to shop around for the best rate

It's important to do your research to make sure you're getting the best rate available. 

Recent research from the retirement specialist Just Group indicated that an annuity buyer aged 70 would secure nearly 20% more income by choosing the best rate over the worst. 

This adds up to £7,400 more every 10 years from a £50,000 pension fund. 

The gap from best to worst at age 65 is 13%, equal to £4,380 more income over 10 years from a £50,000 pension.

Life expectancy is a key factor in determining the annuity rate that you're offered.

The longer you're expected to live, the lower your rate, because the provider expects to be paying you for longer. For this reason, a 65 year old will generally receive a lower income than a 75 year old.

Will annuity rates fall? 

The latest cut to the base rate may result in annuity rates starting to fall. 

Annuities are partly funded by government bonds (known as gilts), which insurers buy. In return, the government pays the insurers a fixed amount of interest, which is tied to the base rate and inflation. 

Providers fund their annuities with these bonds and gilts because they're among the safest types of investment. 

When the Bank of England base rate and inflation are low, gilts become more expensive and the rate of interest (or yield) falls. Lower yields result in lower annuity rates and vice versa. 

A 65 year old with a £100,000 pension only received around £5,000 per year from a single life level annuity back in July 2021. 

Numerous base rate increases then had a positive effect on rates. The current level for a 65 year old is around £7,500 per year.

• Find out more: best annuity rates.

Drawdown as an alternative to an annuity 

There are several options when it comes to converting your pension pots. 

Choosing an annuity means that your money is no longer invested and it therefore won’t have the opportunity to grow.

With pension drawdown, however, you keep your savings invested and draw out income when you wish. This flexibility has made drawdown the most popular retirement income option.

But there are risks to consider. It's up to you to manage your investments and withdrawals carefully to ensure your pot lasts for the rest of your life. The value of your pot could take a hit if your investments underperform or if you withdraw too much too soon. 

You can also cash in pensions entirely, but you’ll potentially have to pay income tax on a significant part of the pot.

• Find out more: best pension drawdown providers.

Plan for the future

Whichever way you end up taking your money, you first need to build up a significant savings pot.

Recent figures from the Department for Work and Pensions show that the proportion of pensioners in poverty was 13% in 2022-23, up from 10% in 2014-15.

Planning for the future will help you ensure you ultimately have a comfortable retirement. 

1. Review and consolidate

You should always try to have a clear picture of how much you’ve saved so far. If you think you’ve lost track of pensions, you can use the Pensions Tracing Service. This free government tool only requires your National Insurance number and the names of former employers.

It may be that you choose to consolidate your pension pots in order to make it easier to manage your retirement savings. 

• Find out more: should I combine my pensions?

2. Consider how much you’ll need

Whether you run out of money or not will probably depend on your level of spending. 

The Pensions and Lifetime Savings Association’s Retirement Living Standards show you what 'minimum', 'moderate' and 'comfortable' retirements look like, and how much you should be aiming to save to deliver your preferred retirement lifestyle.

For a couple, you'd need around £376,700 if you opt for drawdown or £408,600 via an annuity in your private pensions to reach the 'moderate' living standard of £43,100 a year. 

• Find out more: how much will I need to retire?

3. Don’t forget the state pension

The state pension is another key source of income that should make life easier in retirement, although you’ll have to wait until you're 66 or 67 to receive it. 

In 2025-26, the full level of state pension rises to £230.25 a week or £11,973 a year. But you won't necessarily get this amount.

Your eligibility for the state pension is partly based on how many years’ worth of National Insurance contributions you’ve paid or have been credited.

You should get a state pension forecast to show you how much state pension entitlement you’ve built up so far and the amount you’ll likely to get when you reach state pension age