Why annuities are back in fashion

People discussing annuities with an adviser — Senior Couple Meeting with Financial Advisor

(Image credit: Getty Images)

Annuities are back. The pension-freedom reforms of 2015, which made it much easier for savers to withdraw retirement income directly from their pension fund, were supposed to destroy the annuities market.

But a decade later, annuity sales are surging. The Association of British Insurers says pension savers bought £7.4 billion worth of them last year, 4% more than in 2024, and annuities are attracting growing numbers of savers with larger funds.

It wasn’t supposed to be this way. Annuities are a relatively inflexible product. They convert your pension savings into a regular income, guaranteed for the rest of your life, but you’re locked into the prevailing rates at the time of your retirement.

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There is no scope for further investment growth and you don’t have pension assets left over to bequeath to your heirs.

Why are retirees returning to annuities?

First, annuity rates have become much more generous over the past few years, largely because they’re closely linked to interest rates and gilt yields, which have trended upwards.

A £100,000 pension pot would now buy a 65-year-old man around £7,700 a year of annual income, assuming he’s in good health.

That compares with just £4,900 a year five years ago, when annuity rates hit a low.

Second, the increased uncertainty of the economic and political environment is even more unsettling if you’re managing a pension fund later in life.

With drawdown plans, you’re constantly trying to work out how much income you can withdraw while being confident your money will last for as long as it needs to.

Since you don’t know how long you’ll live or what returns your pension fund will achieve, that’s a difficult task. And in volatile times, it feels even more daunting.

Annuities, by contrast, provide certainty and security.

Factor number three is the changing rules on inheritance tax.

Right now, pension assets bequeathed to your heirs don’t usually count towards the value of your estate for inheritance tax (IHT) purposes. But from April 2027, that will no longer be the case.

As a result, your generous bequest of pension assets could actually mean you’re leaving your heirs with an IHT headache.

In which case, an annuity, where you’re not passing on unused cash, may be a better option for all concerned.

Against this backdrop, many more savers are attracted to annuities – including wealthier savers who would previously have been considered prime candidates for income-drawdown plans.

It also helps that providers have become more innovative, designing new types of annuity that tackle some of the problems historically associated with the products.

Still, it’s more important than ever to follow the golden rule with annuity purchases: never simply buy the annuity on offer from the pension provider where your savings are invested.

Rates vary enormously from one provider to another – and, increasingly, so does the design of the product.

Taking financial advice on an annuity purchase can make a huge difference to your retirement income.

A specialist will help you find the most competitive rates but also advise you on the right type of annuity.

For example, people seen as in less good health may qualify for higher rates from some providers – that could simply mean you’re a little overweight or have smoked in recent years, or even that you work in a profession considered riskier.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.