Annuity rates have risen to a new record 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 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 £7,882 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 nearly 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 been a ray of sunshine for retirees in these turbulent times. The latest data from HL’s annuity search engine shows that that rates have continued to soar skyward, with a 65-year-old with a £100,000 pension now able to get up to £7,882 per year from a single life level annuity with a five-year guarantee. This is up more than 60% on what was available five years ago.
“Inflation-linked products have also been on the rise with one that rises 3% per year currently offering up to £5,786 per year. These increases are welcome news for anyone in the market for a guaranteed income in retirement and have contributed to a real revival in a market that was once considered on the edge of extinction. 2024 was a bumper year for the annuity market and current rates will continue to fuel interest.
“However, there are clouds gathering on the horizon. The expectation is that the Bank of England will cut interest rates in May and may look to reduce them still further in its bid to shore up growth. Such a move could well put downward pressure on annuity incomes and so we could see them falling back over the coming months. It’s important not to panic though. Interest rates are not expected to fall anywhere near as quickly as they were raised, and we are not expected to see a return to interest rates anywhere near as low as we saw in recent years so we aren’t expecting annuity incomes to return to the much lower levels they hit a few years back.”
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, 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.
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 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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