Annuities are back in fashion among retirees amid high inflation and pension reforms. Sales of annuities worth more than £250,000 rose by 31% in 2025, said the Association of British Insurers (ABI), and sales of annuities valued at over £500,000 rose by 54%.
Once viewed as a “dull, poor value product”, said The Guardian, annuities are making a comeback. They have become “much more generous” in the past few years, said MoneyWeek, because of higher interest rates and also the government’s impending reforms that will include pension wealth in inheritance tax calculations.
Choosing an annuity rather than staying invested through drawdown when you retire means “a guaranteed income for life”, said the ABI, with the option of providing for loved ones “without worrying about potentially penal tax impacts”.
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What is an annuity?
Annuities, said St James’s Place, are a way of “guaranteeing a regular income in retirement”.
They work like an insurance product, said Unbiased, so you swap some or all of your pension pot to purchase a product from an insurer who “agrees to pay you a regular income for the rest of your life or a set period”.
The income you receive depends on “a number of things”, such as your pension value, your age, health, and the rates at the time.
The main attraction is the “security” the products provide, so you know how much you will get each year, said RestLess, but they “won’t be right for everyone”.
Why have annuities become more popular?
The ABI has highlighted more interest in escalating annuities, where payments increase over time in line with inflation. This suggests people are “looking for protection against the erosion of income”, said Which? But it does mean accepting lower payments initially, and “it could take as long as 15 to 20 years to exceed what you would have got from a level annuity”.
Changes to inheritance tax rules on pensions have also given annuities a “new lease of life”, said The Guardian. The changes mean “unused pension savings” could be taxed as part of someone’s estate if they are worth more than the inheritance tax threshold.
Pros and cons of an annuity
Annuities provide “predictability, security, and simplicity”, said Unbiased, compared with leaving your pension invested where it may lose value.
But there are risks, as the amount you get depends on interest rates at the time and “may not be as much as you hope for”. Additionally, once purchased, said RestLess, “you can’t change your mind”.
It is also important to consider your tax bill, as the payments could push you into a higher tax threshold depending on any other income you receive.
There are ways to “combat the issue of inflexibility”, said Charles Stanley, by splitting your pension pot and annuitising in tranches. This could help “build up your guaranteed income as your needs increase” while growing the rest of your pension pot by remaining invested, but remember that investments can fall in value.
