Retirees considering buying an annuity may find the income they could get falls short of expectations, analysis suggests.
An annuity is a fixed retirement income that someone buys with their pension pot, often paying out for the rest of their life.
Average annual annuity incomes were down by 6.3% in 2020, marking the third year in a row of falls, according to Moneyfacts.co.uk.
Its findings were based on someone in their mid-60s buying an annuity for a £10,000 purchase price.
The pension freedoms, introduced in 2015, have given people a much wider range of options for how they use their retirement pot.
People buying an annuity may find they can get a higher retirement income from an “enhanced” annuity, if they have a medical condition. Not all providers offer enhanced annuities, so it is worth shopping around.
Other than buying an annuity, they could draw down some of it to use as a retirement income, cash in all of it, or leave it untouched and allow it to continue growing, for example.
The Government-backed Pension Wise service offers free retirement guidance to over-50s.
Rachel Springall, a finance expert at Moneyfacts.co.uk, said: “Retirees considering an annuity would be disappointed to see another fall in the average annual income for the third year in a row, so it would be understandable for them to favour pension drawdown instead.
“Indeed, since pension freedoms were introduced in 2015, annuity income has fallen for five out of the six years.”
Ms Springall continued: “It would be wise for consumers to seek independent financial advice when it comes to their retirement plans and keep up with regular reviews of their investments and options.”