Annuity rates soar close to all-time high – is now a good time to buy an annuity?

Annuity rates have soared by 58% over the past four years – close to an all-time high – while savers with larger pension pots are increasingly choosing to buy the income product.

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

A 65-year-old with a £100,000 pension can get up to £7,793 a year with a single-life level annuity with a five-year guarantee, according to Hargreaves Lansdown. This is just shy of the all-time high of £7,947, recorded in June 2025.

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Today’s figure is a vast improvement on the £4,943 annual income available in August 2021, for the same sized pension pot.

The investment platform has also noticed that the average size of pension pot used to buy an annuity has rocketed more than 160% in recent years.

“The popularity of annuities continues to soar, with more and more people making use of them as part of their retirement planning,” comments Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.

“Our client data shows the average annuity purchase size has grown from £62,301 in the first six months of 2021 up to £162,729 in the same period of 2025.”

She says it “flies in the face” of the idea that people with bigger pension pots opt for income drawdown. Those with larger pensions may be attracted to the better value annuities on offer, and the peace of mind that comes with securing a guaranteed retirement income for as long as they live.

So, why have annuity rates been rising? Annuity rates are closely linked to government bond (gilt) yields, which surged to their highest level since 2008 in January.

Gilt yields are affected by interest rates; the rise in interest rates over the past few years has been good news for annuity incomes.

However, the fall in interest rates in 2025 – the Bank of England has reduced rates three times this year, with its most recent cut in August, from 4.25% to 4% – does not seem to have affected annuity incomes.

For example, at the start of this year, a 65-year-old with a £100,000 pension could get up to £7,235 a year with a single-life level annuity with a five-year guarantee. Now the figure is £7,793, meaning incomes have actually increased while interest rates have dropped.

Pete Cowell, head of annuities at Standard Life, says the surge in annuity rates offers retirees “one of the strongest opportunities yet for securing a guaranteed income in retirement”.

He comments: “While the recent upward trend has been steady, it feels unlikely annuity rates will fall back to historic lows. Interest in annuities is likely to remain strong, particularly given the anticipated changes to inheritance tax in 2027, which may prompt more people to consider annuities as part of their retirement planning.”

Morrissey adds: “Rising interest rates have seen incomes climb in recent years and people’s interest has risen along with them. The Association of British Insurers (ABI) recently hailed 2024 as a bumper year for annuities with sales of £7 billion. It’s a momentum that will continue into 2025 as people mull the best option for securing a guaranteed income in retirement.”

Indeed, annuity sales jumped 24% last year, and hit a 10-year high, according to the ABI. The most common age to purchase an annuity continued to be aged 65, making up 20% of all sales.

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.

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 may 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."

Indeed, annuity rates drifted downwards in 2024 following two interest rate reductions, but then soared during the gilt turmoil in January.

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".

Why are annuities so popular?

A big reason is the fact annuities represent much better value, and pension savers can now get a bigger annual income in exchange for their pension pots compared to if they’d bought the same annuity just a few years ago.

This income is guaranteed as long as they live, so it provides security and peace of mind that the insurer will keep paying the money regardless of how long the retiree lives. Some annuity payouts increase each year, helping eliminate the inflation risk, while others pay an income to a spouse on death.

Another reason why annuities have become more popular in recent months is last year's Autumn Budget announcement that pension pots will be liable for inheritance tax from April 2027.

Pete Cowell, head of annuities at Standard Life, comments: “Looking ahead, we expect annuity rates, as well as the demand for these types of products, to remain strong, especially with pensions being brought into scope for inheritance tax from 2027. Wealthier savers may be encouraged to access more of their pensions, with annuities becoming an increasingly attractive way of doing so.”

Morrissey adds: "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.”

Is an annuity right for me?

Just because rates are high at the moment and represent good value, 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.

We look at how to find the best pension drawdown provider in a separate guide.

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.

Stephen Lowe at the retirement firm Just Group notes: “I think in today’s environment many people are seeing current annuity rates as sufficient to meet their retirement objectives and a good time to lock in. Along with other sources of guaranteed income such as the state pension, it provides peace of mind that there will always be an ongoing income to cover day-to-day bills.”

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 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.

Purchasing an annuity earlier in retirement typically results in higher overall total income. However, annuity rates tend to increase with age, meaning those who choose to buy an annuity later in retirement are likely to benefit from better rates.

As of May 2025, rates for a healthy 60-year-old were 7.01% compared to 8.54% for a healthy 70-year-old. This results in an annual income of £7,010 for a 60-year-old versus the £8,540 a healthy 70-year-old may expect to receive on a £100,000 pension pot – a difference of £1,530, according to Standard Life.

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.”

Shopping around for an annuity

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, 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 you getting an enhanced annuity, which pays a higher rate of income.