Annuity rates rise 9% - is now a good time to buy an annuity?

Average annuity rates have risen 9.5% over the past year - but could fall in 2025 if interest rates are cut again.

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.

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Today's figure has been boosted by the bond market turmoil. Annuity rates are closely linked to gilt yields, which last week surged to their highest level since 2008. A few days ago, the same pension saver would have received up to £7,235 a year, but can now get almost £200 more in annual income.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, comments: "We could see further income rises in the weeks to follow and this could push incomes up to the highs we saw in the aftermath of the mini-Budget."

The January boost reverses the small fall in the amount of annuity income that could have been bought by pension savers towards the end of last year, when annuity rates drifted downwards following two interest rate reductions.

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

Experts expect there could be at least two more base rate cuts this year.

Morrissey tells MoneyWeek: "The prospect of further interest rate cuts could see incomes fall back but any cuts when they come are expected to be gradual so we aren’t expecting any dramatic falls in annuity incomes."

Annuities have soared in popularity over the past few years as retirees rushed to take advantage of a surge in annuity rates.

A total of 82,061 annuities were sold in 2023/24, up 39% compared to a year earlier, according to the Financial Conduct Authority (FCA).

Annuities 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.

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 government bond (gilt) yields. If yields stay high, or soar further, we could see an increase to annuity rates.

Looking further ahead, 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".

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.

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.

The 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.

Pete Cowell, head of annuities at Standard Life, comments: "Rather than simply deciding whether to annuitise, people should consider how much of their retirement savings they could use to buy an annuity, as well as what age best suits them, and keep this under review if circumstances change, especially since annuity rates typically improve as you age."

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.

“There are several providers on the market and they all price differently so if you just accept the first quote then you may be missing out,” Morrissey says.

Retirees are potentially missing out on thousands of pounds worth of income by failing to shop around for the best annuity deal. About four in 10 annuities are still bought from the retiree’s own pension provider, according to the FCA.

Stephen Lowe at the retirement specialist Just Group warns that there is a huge difference between the best and worst annuity rates. In fact, the best deal for a 65 year old can pay more than the worst deal for a 70 year old - reinforcing the importance of shopping around for the best rate, given that older savers should be able to secure a higher annuity income than those younger than them.

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.

We looked at the figures in this article: “Is it worth taking out an inflation-linked annuity?”

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.