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Annuities have become increasingly popular in recent years, and rising annuity rates could make them even more appealing this year, as they offer retirees the security of a guaranteed income for life.
Annuity rates are influenced by several factors, including government bond yields (known as gilts) and interest rates. Generally, when gilt yields and interest rates rise, annuity rates also increase, boosting the retirement income these products can provide. Conversely, falling rates usually lead to lower annuity payouts.
Recent conflict in the Middle East has stoked fears that UK inflation could remain elevated for longer, which in turn has pushed gilt yields higher. According to Moneyfacts, annual annuity income for someone using a £50,000 pension pot has risen by £60 year-on-year, from £3,498 in March 2025 to £3,558 today.
Rachel Springall, Finance Expert at Moneyfactscompare.co.uk, said: “Pensioners looking to secure an annuity for a regular income could see a boost to the rates on offer in the weeks ahead.
“Ten-year gilts have been rising over the past few weeks, hovering around the 5% mark. Rising gilt yields have been known to cause annuity rates to soar. If this comes to fruition, it could mean retirees become hundreds of pounds better off. During 2022, annuity rates shot up amid interest rate volatility and stock market uncertainty, so much so that someone who took annuity income in December 2022 versus the start of that year was around £900 per year better off on average.”
Here, we explain how annuities work and what the alternatives are, to help you decide which might be the best option for you.
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If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
HUB Financial Solutions is rated ‘Excellent’ on Trustpilot (Mar 2026). With investing, your capital is at risk.
What is an annuity and how does it work?
An annuity is essentially a contract with an insurance company. In return for handing over some or all of your pension savings to them, you’ll be paid a guaranteed income for life, or a fixed term.
As well as being influenced by gilt yields, the amount of annuity income you’ll get for your money will depend on several different factors. These include your age, whether you want the income you get to increase each year in line with living costs, your health, and whether you want the annuity to continue to pay out to your partner or spouse when you die.
The guaranteed income that annuities offer can provide valuable peace of mind that you’ll know exactly how much income is coming in each month, which can be really useful if you have fixed expenses you need to cover. Bear in mind, however, that if you choose what’s known as a ‘level annuity’ rather than one which is linked to inflation, the income you receive won’t increase in line with living costs.
Helen Morrissey. Head of retirement analysis at Hargreaves Lansdown said: “Even relatively low inflation over time will nibble away at your purchasing power and could mean your budget gets increasingly stretched over time. This means that even though inflation-linked annuities offer a lower income at outset, the fact that incomes increase every year can offer valuable reassurance, alongside your state pension, which also increases in line with the triple lock.”
Find out more about the impact of inflation on annuities and your pension in our guide How does inflation affect my pension?
What are the drawbacks of annuities?
One of the biggest downsides of annuities is that once you’ve bought one, your provider will usually keep your pension fund when you die, meaning you can’t usually pass your savings on.
However, there are ways to ensure your loved ones end up with something. For example, if you take out a joint life annuity with someone else, this will ensure that your spouse, partner, or other named beneficiary will receive the income from it when you die.
You can also opt to purchase what’s known as ‘value protection’, which will ensure that your chosen beneficiary will receive up to 100% of your remaining pot as a lump sum should you die. Some providers will include value protection as standard for the first 90 days after you’ve purchased your annuity. You can find out more about how the different types of annuity work in our guide Annuities explained.
Gary Smith, Financial Planning Partner and retirement specialist at wealth management firm Evelyn Partners, said: “Attaching death benefits to annuities can be expensive. Headline annuity rates might be quite attractive but as soon as you start to add on desirable features like death benefits and inflation-protection, the incomes on offer for the same sum tend to plunge. You end up having to accept either a much lower income – certainly to start off with – or you spend a bigger chunk of your pot to get a higher income.”
What’s the alternative to an annuity?
Many people currently take an income from their pensions using pension drawdown – often known as flexible drawdown or flexi-access drawdown – because it provides them with greater flexibility than an annuity.
With drawdown, as the name suggests, you draw down money from your pension when required, and the rest of your pension stays invested, either with your current pension provider or another provider. When you die, under current rules, any money that’s left in your pension pot, can be passed on to your loved ones tax-free if you’re aged under 75 when you die. If you die aged over 75, your beneficiaries must have to pay income tax on any income taken from it.
This will change from 2027 when pensions will be brought into the scope of inheritance tax.
Helen Morrissey said: “We’ll see many more people being dragged into paying inheritance tax because their defined contribution pension is now counted as part of their estate. It will mean people who were planning to leave money in their pension to give tax-efficiently to family after their death will need to revisit their finances.
“The likelihood is we will see people looking to spend down their pensions as retirement income rather than leave them untouched, a move which could keep the rest of someone’s estate below the IHT threshold. They might choose to give some of this money away to their family to help them with life’s milestones. We may also see an increased interest in annuities as people look to secure a guaranteed income while also keeping their estate below the inheritance tax threshold.”
Mr Smith of Evelyn Partners agreed that while the death benefits on offer with annuities currently seem poor value compared to leaving an unspent pot free of IHT, that balance might change slightly in 2027, especially for retirees who value a guaranteed income more than the ability to make ad-hoc withdrawals.
He said, “A pot can be kept in drawdown in early retirement and then spent on an annuity later on, either using all or part of the pension fund, and age 75 may well become an important tipping point, where remaining pots are swapped for annuities – particularly the annuity incomes on offer tend to get better as age increases.”
You can learn more about forthcoming pension and inheritance tax changes in our guides Inheritance tax and pensions: what’s changing in 2027 and 5 ways to beat pension Inheritance Tax Budget changes.
A final thought...
Remember that purchasing an annuity is a once-and-forever decision, so it’s critical you weigh up your options carefully before making any decisions.
Clare Moffat, Pensions and Tax Expert at Royal London, said: “The most suitable retirement income option should be tailored to an individual’s needs. While annuities aren’t for everyone, there are scenarios where they could be beneficial, so they should be considered as part of the retirement planning process. Many individuals want complete flexibility with their retirement income, which explains the popularity of drawdown, while for others, buying an annuity offers them the comfort of a guaranteed income.
“For those people initially opting for income drawdown, that may not be the final decision. As people get older, some are keen to introduce a form of guarantee, so a happy medium for many is an annuity to cover basic living costs, providing comfort and reassurance, while leaving the rest invested for extra flexibility.”
If you’re not sure how to take an income from your pension, or whether to reconsider your current retirement planning strategy, you may want to seek professional advice.
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If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
HUB Financial Solutions is rated ‘Excellent’ on Trustpilot (Mar 2026). With investing, your capital is at risk.
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