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Annuity rates have reached an 18-year high, boosting their appeal for retirees looking for a guaranteed income when they stop work.
An annuity is essentially a contract with an insurance company. In return for handing over some, or all your pension savings, you’ll be paid a guaranteed income for life, or for a fixed term. This income usually dies with you, and so can’t be passed onto loved ones. You can read more about how annuities work in our article Annuities explained.
Annuities have become more popular following changes announced in the October 2024 Budget, which from April 2027 will see pensions brought into the scope of inheritance tax.
When this happens, those inheriting their parents’ drawdown pension savings could face paying “death tax” of nearly 70%. That’s because if their parents are aged over 75 when they die, beneficiaries will not only have to pay Inheritance Tax on the whole fund, but also income tax at their marginal rate on the remainder (which could be as high as 45% if they’re an additional rate taxpayer). Learn more about the Budget changes in our guides Inheritance tax and pensions: what’s changing in 2027 and 5 ways to beat pension Inheritance Tax Budget changes.
These changes mean that people may be less likely to view their pension as an inheritance tax planning vehicle, and will instead be focusing on the best ways to take a retirement income, including using some or all of their retirement savings to buy an annuity. The total value of premiums paid into individual pension annuities grew 4% to £7.4 billion in 2025, according to the latest data from the Association of British Insurers (ABI). This marks the highest annual level since pension freedoms were announced 11 years ago.
David Hunter, wealth planner at Succession Wealth, said: “Annuities ensure a lifetime of guaranteed income, so you’ll always know the annual amount you’ll receive, regardless of your lifespan. This reliable income can be particularly comforting if you’re concerned about stock market volatility.”
Here, we look at how much income annuities can currently provide pension savers with, and some of the factors you’ll need to consider when working out whether an annuity could be right for you.
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If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide Chartered independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial adviser. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 2,600 reviews on VouchedFor, the review site for financial advisers.
Why are annuity rates rising?
Bond yields have been pushed higher by the ongoing US-Iran conflict, as well as concerns about inflation and rising government borrowing.
This matters to savers and retirees because higher gilt yields can feed through into more attractive annuity rates. The 10-year gilt yield rose above 5.26% earlier this month, its highest level since June 2008, while the 30-year yield climbed above 5.90%, its highest level for 28 years. Yields on 15-year gilts, which annuity rates are closely linked to, have also reached around 5.62% – another 28-year high. For people considering using some or all of their pension to buy an annuity, these higher yields can translate into a higher guaranteed income than would have been available when rates were lower.
The last time UK annuity rates were nearly as high as this was during the 2007/08 banking crisis. Rates subsequently declined following this period, and plummeted to record lows in the aftermath of Brexit.
What sort of income can I get from an annuity?
The amount of income you get from an annuity depends on how much of your pension you plan to use, along with factors such as your age, health, and lifestyle.
For example, according to Hargreaves Lansdown, someone in good health aged 65 with a £100,000 pension pot could currently buy an annuity that will provide them an income of £8,125 per year. By contrast, someone the same age buying an annuity at the beginning of 2022 would only have received £4,521 a year in return for the same amount.
Andrew King, pension technical specialist at wealth management firm Evelyn Partners, said: “Annuity rates can, however, vary dramatically with the individual’s age, health and address, as well as the type of product chosen – with options for inflation protection, periods of guaranteed pay-outs, and joint-life death benefits.
“We are seeing a clear uptick in interest among clients in annuities, primarily due to the significant rise in incomes, but some also have an eye on the forthcoming inclusion of unspent pension assets in inheritance tax liabilities. This rule change arriving in April 2027 is encouraging some to think about using at least a part of their pension pot to buy an annuity rather than keep a big drawdown fund into old age – especially those with large pots or wider IHT liabilities.
“One other driver is that many savers are sitting on drawdown pots that have grown very substantially due to the bullish stock markets of recent years and might be looking to seal in some of those gains and convert them into a guaranteed income.
“Annuity rates could go higher from here if bond yields remain close to or above their current levels as insurers continue to reprice annuity products. It certainly seems unlikely the incomes on offer will fall in the coming weeks and months, so there is plenty of opportunity for savers on the verge of or in retirement to consider these products.”
Should I buy an annuity?
Whether or not you decide to use some or all of your pension to buy an annuity will depend entirely on your own circumstances, including the value of your pension pot, what you want to get out of your retirement, your anticipated life expectancy, and so on. There are several different types of annuity available, so choosing the right product for you is crucial. However, an annuity may appeal in the current economic climate as a way of providing you with a secure income to meet essential bills.
Nick Flynn, retirement income director, Canada Life said: “With people increasingly living longer lives, more individuals are seeking guaranteed income solutions, making annuities an attractive option. Furthermore, with pensions coming into the scope of inheritance tax from 2027, this could be an early sign that people are rethinking their financial plans for their retirement.
“Our own experience indicates that larger pension pots are also being used to purchase annuities, as customers seek to take advantage of the current high rates available. It’s not uncommon to now see pension funds in excess of £500,000 looking to secure an annuity, dramatically increasing the average purchase price.”
According to the ABI, there has been an 8% rise in the number of people 70 and over buying an annuity, suggesting those in later life are looking for stability while making the most of the favourable rates currently available.
Bear in mind that it’s crucial to do plenty of research if you’re considering buying an annuity. Ms Morrissey said: “Don’t just accept the first quote you are offered. Different providers offer different rates and taking the time to look across the market could leave you thousands of pounds better off over the course of your retirement. You can use an annuity search engine to get a sense of what is on offer.
“You also don’t need to annuitise all your pension at once. You can annuitise in stages as you go through retirement. This means you can secure guaranteed income as your needs change and leave the rest invested where it has the opportunity to keep growing. As you age you will also be able to secure incomes at higher rates and if you have developed a condition that qualifies you for an enhanced annuity then you will get a further bump in income.”
Where to seek help
If you are unsure how to manage your pension savings, the Government’s Pension Wise service offers people aged 50 and above with free guidance on their pension choices at retirement.
It’s worth using Pension Wise as a starting point, but if you want professional financial advice tailored to your particular situation, you’ll need to speak to a financial adviser. Find out more in our article How to find the right financial adviser for you.
Rachel Springall, spokesman for Moneyfactscompare, said: “Retirees releasing funds out of their pension pots must get good advice to understand the longer-term impact on their retirement income, and whether an annuity is an appropriate choice, or if they should consider an alternative guaranteed fixed term income plan. There are varying income options on annuities, such as those that link to inflation or rise by a set percentage and applicants in poor health could even be eligible for an enhanced annuity.
“Making sure the annuity is set up correctly to suit a pensioner’s circumstances will be vital, such as a joint life annuity to continue payments to a beneficiary after death for the rest of their life. Sometimes it can be difficult to have wider conversations about later life, but it is really important to understand retirement options and estate planning for peace of mind.”
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If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide Chartered independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial adviser. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 2,600 reviews on VouchedFor, the review site for financial advisers.
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