The Appeal (or not) of Guaranteed Income

Since the 2016 Pension Freedoms, UK consumer sentiment towards annuities has undergone a significant shift. While previously the default retirement income product, many consumers initially opted for flexible drawdown or full encashment, valuing immediate access and control over their pension pots. This led to a precipitous decline in annuity sales.

However, in recent years, rising interest rates have sparked renewed interest in annuities. Consumers and their advisers are increasingly recognising the value of a guaranteed lifetime income, particularly amid concerns about longevity risk and market volatility.

While annuities remain a minority choice compared to drawdown options, there’s growing appreciation for their role as a cornerstone of balanced retirement planning — often used alongside more flexible alternatives. However, significant understanding gaps and low consumer engagement with annuities persist.

Bringing Annuities to Life: A Case Study

Scenario

At Envizage we analyzed the financial outcomes for a 65-year-old single retired female with the following profile:

• Assets: £500,000 in a medium risk (60% equity 40% bond) SIPP
• Income: Full UK state pension
• Goals:
  1. Maintain her desired lifestyle during retirement
  2. Leave a financial legacy
• Key modelling assumptions:
  1. Equities have a 3% risk premium over UK Government bonds
  2. 20 year expected government bond returns are 5%
  3. Annuity rates are best buy rates as at 19 May 2025
  4. Mortality rates are latest published UK general population mortality rates

For customers, buying an annuity product involves surrendering access to some or all of their capital in exchange for a guaranteed lifetime income. While they can clearly see the immediate consequence of losing capital access, the key question remains: will this guaranteed income actually improve the outcomes I care about most — maintaining my lifestyle and being able to leave a legacy?

Envizage’s unique modelling approach allows us to calculate a percentage probability of achieving the outcome that the customer cares about, namely being able to maintain their standard of living for the rest of their (uncertain) lifetime. The following results show the output from our engine for 3 different expense patterns.

Using current open market rates (effective as at 19 May 2025), we modeled three expense scenarios based on the PLSA’s Retirement Moderate Living Standards for a single-member household and explored five levels of immediate annuity allocation.

1 – Level Retirement Lifestyle

Moderate target throughout retirement, without special aspirations.

Scenario	Achievability	50th Percentile Net Worth @ Death	Delta
100% Drawdown, 0% Annuity	76%	£187,055.17	0%
80% Drawdown, 20% Annuity	83%	£185,134.44	-1%
60% Drawdown, 40% Annuity	95%	£179,059.88	-4%
40% Drawdown, 60% Annuity	97%	£173,713.72	-7%
20% Drawdown, 80% Annuity	100%	£150,839.00	-19%
0% Drawdown, 100% Annuity	100%	£110,291.79	-41%

Our Analysis: When aiming for a moderate retirement income, an allocation of between 40% to 60% to an immediate annuity reduces the chance of running out of money in retirement from one in 4 to less than 1 in 20, while producing a small decrease in net worth for inheritance purposes.

2 – Active Retirement Lifestyle

Active for the first 10 years, transitioning to a moderate later stage.

Scenario	Achievability	50th Percentile Net Worth @ Death	Delta
100% Drawdown, 0% Annuity	64%	£99,977.93	0%
80% Drawdown, 20% Annuity	67%	£101,333.42	1%
60% Drawdown, 40% Annuity	74%	£97,934.13	-2%
40% Drawdown, 60% Annuity	86%	£96,336.33	-4%
20% Drawdown, 80% Annuity	98%	£85,884.01	-14%
0% Drawdown, 100% Annuity	97%	£59,535.29	-40%

Our Analysis: For retirees planning an active early retirement phase, the benefits became even more pronounced, but with more nuanced considerations. To achieve a similar reduction in risk requires a higher annuity allocation, and a lower level of access to capital that the customer may be unwilling to take. Perhaps a situation where the phasing of the purchase of an annuity might satisfy their conflicting needs.

3 – High-Expense Scenarios

Active for the first 10 years, followed by high care expenses.

Scenario	Achievability	50th Percentile Net Worth @ Death	Delta
100% Drawdown, 0% Annuity	45%	-£48,024.35	0%
80% Drawdown, 20% Annuity	43%	-£50,456.12	-5%
60% Drawdown, 40% Annuity	42%	-£51,379.07	-7%
40% Drawdown, 60% Annuity	40%	-£52,197.85	-9%
20% Drawdown, 80% Annuity	36%	-£49,552.95	-3%
0% Drawdown, 100% Annuity	21%	-£50,550.90	-5%

Our Analysis: For a consumer spending at a likely unsustainable rate, no allocation to annuity will improve this. Their hope is that maybe good investment returns on the drawdown will save the day.

The examples above demonstrate how the Envizage holistic advice engine can help millions of people around the world understand their choices and tradeoffs so they can make better decisions for their future. The case above is a narrowly focused retirement example, but our engine can be used in any financial planning scenario.

Our single engine powers:

• Advice that does not constitute a personal recommendation (financial planning, or what an end consumer might call ‘personalised guidance’)
• Targeted support (to determine cohorts suitable for ready-made suggestions)
• Simplified advice; and
• Holistic advice

Our solution enables financial institutions to:

• Simplify Complexity: Present annuities and other strategies/products in an intuitive, digestible way.
• Personalize the Experience: Offer tailored product recommendations based on goals, risk, and income needs optimizing the outcomes that matter most to the individual customer.
• Enhance Digital Engagement: Enable interactive tools for both self-service and advisor-assisted journeys.
• Streamline Operations: Optimize processes for origination, servicing and compliance.
• Ensure Transparency & Compliance: Build trust through clear, consistent communication.

If this sounds relevant to you and your organisation, let’s talk: contact-us@envizage.me