Annuity rates have risen to their highest level since 2008, 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 Budget 2024 pension changes 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 of all of their retirement savings to buy an annuity.
David Hunter, wealth planner at Succession Wealth, said: “As more people look to secure a reliable retirement income for life, sales of pension annuities jumped 24% in 2024 to 89,600, surpassing the previous year’s total and reaching a new ten-year high. The latest pension annuity data from the Association of British Insurers (ABI) shows that total annuities sales reached £7 billion, a 34% increase on 2023.
“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.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation* with a qualified financial advisor. 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 1,500 reviews on VouchedFor, the review site for financial advisors.
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 £7,639 per year. Comparatively, someone buying an annuity at the beginning of 2022 would only have received £4,521 a year in return for the same amount.
The last time UK annuity rates were as high as this was during the 2007/08 banking crisis. Rates subsequently declined following this period, and plummeted record lows in the aftermath of Brexit. The introduction of pension freedoms in 2015 was a contributing factor, giving pensioners more flexibility over how to access their pensions, including the ability to withdraw a tax-free lump sum.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: ““Annuity incomes have surged again, delivering their highest incomes in more than 16 years. A 65-year-old with a £100,000 pension can currently get up to £7,639 per year from a single life level annuity. This is the highest since December 2008 before unisex annuity rates were brought in and a man could get £7,646 a year.
“It’s a reversal of fortune for a market that many thought had been all but killed off by a combination of rock-bottom interest rates and the Freedom and Choice reforms. Rising interest rates have seen incomes climb in recent years and people’s interest has risen along with them. However, you need to consider your options carefully. Once bought, an annuity cannot be unwound, so if you act in haste you may find you are repenting at leisure if you don’t get the right type of product for your needs.”
Why are annuity rates rising?
Annuities are affected by a variety of factors, such as UK government bonds – also known as gilts – and interest rates. With gilt yields increasing this year, and interest rates remaining high despite the Bank of England trimming rates recently, annuity rates have been steadily increasing.
However, in the same period the value of defined contribution pensions has been falling, so people approaching retirement may have a smaller pot with which to buy an annuity or go into drawdown.
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 Association of British Insurers, the most common age to purchase an annuity continues to be aged 65, with 20% of all sales made by people this age. The ABI’s data shows that more annuity purchases occurred after taking financial advice in 2024, with 36% of buyers taking advice beforehand compared to 29% in 2023.
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 advisor. Find out more in our article How to find the right financial advisor for you.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation* with a qualified financial advisor. 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 1,500 reviews on VouchedFor, the review site for financial advisors.
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