Annuity sales reach 10-year high - is now a good time to buy an annuity?

Annuity sales jumped 24% last year, as pension savers took advantage of rising annuity rates.

Sales reached 89,600 and hit a 10-year high, according to the Association of British Insurers (ABI).

An annuity is an insurance product that delivers a guaranteed income for life in exchange for a pension pot.

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Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, comments: “After years in the doldrums, the annuity market has been kick-started off the back of rising interest rates and soaring gilt yields and this has tempted retirees back to the market.”

Average annuity rates have risen 9.5% over the past year. According to data from Hargreaves Lansdown, the average 65-year-old with a £100,000 pension pot can get up to £7,425 as annual income from a single-life level annuity with a five-year guarantee.

This compares to £6,781 in January 2024. Annuity rates are also far higher than five years ago (the same pension saver could have received £5,094) and a decade ago (£5,715). This means retirees now get more money in exchange for their pension pots.

Annuity rates are closely linked to government bond (gilt) yields, which last month surged to their highest level since 2008.

Pete Cowell, head of annuities at Standard Life, says the spike in sales last year is due to improved annuity rates and also a “renewed focus on using these products to deliver income certainty”.

He adds: “The majority of people say they want some form of certainty with their retirement income, and annuities do just that - providing peace of mind through a regular, guaranteed income.”

The ABI data also revealed that six providers offer annuities to new customers, and last year 69% of annuity buyers switched – taking an annuity from a different provider to the one they held their pension savings with – compared to 64% in 2023.

Shopping around for an annuity can get you a better deal compared to staying with your current pension provider.

The most common age to purchase an annuity continues to be aged 65, making up 20% of all sales.

Annuity rates could fall this year, if interest rates are cut again. Annuity rates drifted downwards last year following two interest rate reductions, but then soared during the gilt turmoil in January.

The Bank of England voted to cut the base rate from 5.25% to 5% last August, its first cut in more than four years. In November, rates were trimmed again to 4.75%.

Last week, the Bank reduced the base rate to 4.5%.

However, even if annuity rates do fall, sales could get a further boost due to last year's Budget announcement that pension pots will be liable for inheritance tax from April 2027.

"This will remove many people’s rationale for using income drawdown as they used it to pass the pension down generations tax-efficiently rather than draw an income from it. As they revisit their retirement income plans, many may opt to secure a guaranteed income through an annuity instead,” comments Morrissey.

She adds: “The fact that annuity rates have remained high at the start of 2025 bodes well for annuities and means we could see a good chunk of the robust growth of 2024 stretch into 2025 too.”

If you're thinking of buying an annuity, we look at the outlook for annuity rates, and what you can do to ensure you get the best deal.

Will annuity rates fall?

The outlook for annuity rates this year depends on what happens to gilt yields. If yields stay high, or soar further, we could see an increase to annuity rates.

But, if interest rates fall, gilt yields will likely follow suit, which will negatively impact annuity rates.

Holly Tomlinson, financial planner at the wealth manager Quilter, comments: "Annuity rates are closely tied to government bond yields, which can be influenced by changes in interest rates. A reduction in the base rate may lead to lower bond yields, potentially resulting in less favourable annuity rates for retirees."

However, Morrissey points out that "we aren’t expecting the Bank of England to cut interest rates anywhere near as quickly as they raised them".

According to Lily Megson, policy director at the financial adviser My Pension Expert, the base rate is expected to continue to fall over the coming year, “meaning that some pension planners consider now to be the best time to lock in an annuity product”.

Is an annuity right for me?

Just because rates are fairly good right now, that doesn’t necessarily mean an annuity is the right retirement strategy for you.

Using your pension pot to buy an annuity is an irreversible decision, so you need to think carefully before making your mind up and should seek financial advice if you are unsure. You can find an independent adviser at Unbiased or VouchedFor.

According to the ABI, more annuity purchases occurred after taking financial advice in 2024, with 36% of buyers taking advice beforehand compared to 29% in 2023.

Some people may prefer to keep their pension pot in drawdown. This is when you keep part of your pot invested (where it will hopefully continue to grow), while withdrawing cash flexibly as and when you need it.

FCA data shows that pensions drawdown is the most popular option among retirees. Almost 280,000 people opted for drawdown in 2023/24, versus about 82,000 annuity purchases.

However, as previously mentioned, this could change as pension pots become liable for inheritance tax. Experts predict that savers may stop preserving their pensions to pass on to beneficiaries tax-free, and instead look at buying a guaranteed income with their pension.

Swapping a pension for an annuity means you get rid of your pension, reducing the size of your estate and any potential inheritance tax bill.

Another benefit of buying an annuity is the peace of mind it gives you. An annuity will pay out an income until you die, so there is no worry that you could run out of money during retirement.

A study from Legal & General and the Happiness Research Institute, an independent Danish think tank, reveals that annuity-holders are more likely to report lower levels of stress (51%) and the highest level of financial confidence (24% versus 21%) compared to those without one.

A potential downside with annuities is that, unless you choose a joint-life annuity, when you die, the income dies with you. So, if you only live a few years after you purchase the product, you won't have received much money from your pension.

Some people may prefer to do a combination of the two approaches. You could use part of your pot to buy a guaranteed income, while leaving the rest invested so that you can draw on it as and when you need.

It’s also worth mentioning that there are different types of annuities on the market. Some are linked to inflation, while others pay a fixed amount out each year.

Joint-life annuities continue to pay an income to a beneficiary (such as a spouse or civil partner) after you die, while others do not.

You can buy an annuity at any time in retirement, so you could leave it until you are older – especially as the older you are, the higher the annual income.

Clare Moffat, pensions expert at Royal London, comments: “The most suitable option will depend on an individual’s needs and 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 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.”

Shop around to secure the best rate

As well as considering what type of annuity is right for you (if any), you should do your homework to ensure you get the best rate.

“Different providers offer different rates and not searching the market can leave you thousands of pounds worse off over the course of your retirement,” Morrissey says.

Almost a third of retirees fail to shop around for the best annuity deal, instead sticking with their pension provider, according to the ABI figures.

Using a comparison site is a good starting point, Morrissey adds, but reminds retirees that there’s more to consider than the annual income alone.

“Single-life annuities offer higher incomes than joint-life ones but the joint-life one will offer an income to your spouse should you die first,” she points out.

Similarly, an inflation-linked annuity will generally offer a lower starting income than a level annuity, but if you live long enough (and inflation is high), you might end up getting more from the inflation-linked product.

Finally, Morrissey recommends giving all of your health details – including whether you smoke or drink – as this information feeds into the insurer’s calculations and can result in a higher rate of income.