The pension product's sales are also skyrocketing, and annuity incomes have increased to their highest level since December 2008
Should you purchase an annuity?
Retirees are receiving enormous payouts from their pension funds, and annuity rates have reached a 16-year high.
A single life level annuity with a five-year guarantee can provide up to 7,639 annually for a 65-year-old with a £100,000 pension, according to Hargreaves Lansdown. Since December 2008, this sum has never been greater.
In return for a pension fund, an annuity is an insurance product that provides a lifetime guaranteed income.
Annuity rates and government bond (gilt) yields are closely related; in January, the former hit its highest level since 2008.
Interest rate changes have an impact on gilt yields, and annuity incomes have benefited from the recent increase in yields. The rate for a 65-year-old with a £100,000 pension hit 7,586 following the 2022 mini-Budget, according to Hargreaves Lansdown.
At Hargreaves Lansdown, Helen Morrissey, head of retirement analysis, describes it as a "reversal of fortune for a market that many thought had been all but killed off by a combination of rock-bottom interest rates and the Freedom and Choice reforms" in 2015, when then-Chief George Osborne declared that retirees no longer needed to purchase an annuity.
She continues, "In recent years, as interest rates have increased, incomes have increased as well, and people's interest has increased as well. With an annual sales of £7 billion, 2024 was recently hailed by the Association of British Insurers (ABI) as a record year for annuities. This trend is expected to continue into 2025 as people consider their options for ensuring a steady income in retirement.
According to the ABI, annuity sales did, in fact, increase by 24% last year and reach a 10-year high. With 20% of all sales, the most popular age to buy an annuity remained to be 65.
New customers can purchase an annuity from six different providers, and last year, 69 percent of annuity buyers switched from one provider to the one where they held their pension savings, up from 64 percent in 2023.
Compared to sticking with your current pension provider, you might be able to find a better deal by shopping around for an annuity.
Annuity rates have gone up by 8% in the last 12 months, according to independent data from Standard Life.
Compared to purchasing an annuity in January 2024, a typical retiree with £100,000 in retirement savings would receive roughly £500 more annually.
A 65-year-old with a normal life expectancy would receive an additional 10,000 from their annuity over the course of their retirement.
"Annuity rates have continued to improve, offering retirees even stronger total incomes," says Pete Cowell, Standard Life's head of annuities.
We anticipate that annuity rates and the market for these products will continue to grow in the future, particularly since pensions will be subject to inheritance tax starting in 2027. Increased access to pensions may be encouraged for wealthier savers, as annuities are becoming a more alluring option.
However, if interest rates are lowered once more, annuity rates may decline this year. Annuity rates fell last year after two interest rate cuts, but they spiked back up during the January gilt crisis.
For the first time in over four years, the Bank of England voted last August to lower the base rate from 5 percent to 5 percent. Rates were reduced once more to 4 percent in November.
The base rate was lowered by the Bank to 4.5 percent last month.
Even though annuity rates may decline, last year's Autumn Budget announcement that pension pots will be subject to inheritance tax starting in April 2027 may further increase sales.
"Many people will no longer have an excuse for using income drawdown because they used it to tax-efficiently pass down their pensions to future generations rather than to take money out of them. Many may decide to use an annuity to guarantee their income as they review their retirement income plans, says Morrissey.
We examine the outlook for annuity rates and what you can do to make sure you get the best deal if you're considering purchasing one.
Should annuity rates decline?
What happens to gilt yields this year will determine the outlook for annuity rates. Annuity rates may rise if yields remain high or continue to rise.
However, gilt yields might follow suit if interest rates decline, which would have a negative effect on annuity rates.
According to Holly Tomlinson, financial planner at wealth manager Quilter, "Annuity rates are directly related to the yields on government bonds, which are subject to fluctuations in interest rates. A decrease in the base rate could result in lower bond yields, which could make retirees' annuity rates less favorable.
Morrissey states, however, that "we aren't expecting the Bank of England to cut interest rates anywhere near as quickly as they raised them."
The base rate is predicted to continue to decline this year, "meaning that some pension planners consider now to be the best time to lock in an annuity product," according to Lily Megson, policy director at the financial advisor My Pension Expert.
Should I get an annuity?
Annuities aren't always the best retirement option for you, even if their rates are currently high and offer good value.
Since using your pension fund to purchase an annuity is an irrevocable decision, you should carefully consider your options and, if in doubt, seek financial advice. Independent advisors are available at VouchedFor and Unbiased.
The ABI reports that in 2024, 36 percent of buyers sought financial advice prior to making an annuity purchase, up from 29 percent in 2023 of the same year.
Keeping their pension fund in drawdown may be the preference of some individuals. This is when you keep a portion of your pot invested, where it should grow, and take out cash as needed.
According to FCA data, retirees most frequently choose to draw down their pensions. In 2023 - 2024, nearly 280,000 people chose drawdown, compared to roughly 82,000 who bought an annuity.
As was already mentioned, though, this might alter if pension funds are subject to inheritance tax. According to experts, savers may now consider using their pensions to purchase a guaranteed income rather than preserving them to transfer tax-free to others.
By exchanging your pension for an annuity, you can lower the size of your estate and your possible inheritance tax liability.
The peace of mind that comes with purchasing an annuity is an additional benefit. Since an annuity will continue to pay out income until your death, you don't need to worry about running out of money when you retire.
Just Group's group communications director, Stephen Lowe, observes: "I believe that many people are viewing the current annuity rates as adequate to fulfill their retirement goals and a good time to lock in in the current environment. When combined with other guaranteed income sources like the state pension, it offers comfort in knowing that daily expenses will always be met.
Annuities have a potential drawback in that the income goes with you when you pass away, unless you select a joint-life annuity. Therefore, you won't have gotten much money from your pension if you only live for a few years after buying the product.
A combination of the two methods may be preferred by certain individuals. A portion of your pot could be used to purchase a guaranteed income, with the remaining portion being invested for future use.
It's also important to note that annuities come in a variety of forms. A fixed amount is paid annually by some, while others are based on inflation.
When you pass away, some joint-life annuities continue to pay an income to a beneficiary (like a spouse or civil partner), but not all of them do.
Since you can purchase an annuity at any point during your retirement, you may decide to wait until you are older, particularly since the annual income increases with age.
According to Standard Life, if a 70-year-old with a £100,000 pension purchased an annuity ten years ago, they would have received £6,650 annually instead of £8,210.
Annuities aren't for everyone, but in some situations they might be helpful, so they should be taken into consideration as part of the retirement planning process, says Clare Moffat, a pensions specialist at Royal London. The best choice will rely on the needs of the individual.
"Drawdown is popular because many people want total control over their retirement income, but purchasing an annuity gives some people the security of a guaranteed income." It's possible that those who initially choose income drawdown will change their minds. Annuities are a good compromise for many people as they age because they cover essential living expenses, giving them comfort and security, while allowing the remaining funds to be invested for additional flexibility.
Researching and purchasing an annuity.
Do your research to make sure you get the best rate in addition to deciding what kind of annuity, if any, is best for you.
Morrissey claims that choosing not to shop around can leave you thousands of pounds worse off in retirement because different providers offer different rates.
According to ABI data, nearly one-third of retirees decide to stay with their pension provider rather than looking around for the best annuity deal.
Morrissey says that using a comparison website is a good place to start, but he also reminds retirees that there are other factors to take into account besides yearly income.
She notes that while joint-life annuities will provide an income to your spouse in the event that you pass away first, single-life annuities offer higher incomes.
In a similar vein, an inflation-linked annuity will typically start out with a lower income than a level annuity, but if you live long enough (and inflation is high), you may wind up receiving more.
Finally, Morrissey advises providing all of your health information, including whether you smoke or drink, since this information feeds into the insurer's calculations and may lead to an enhanced annuity, which pays a higher income rate.
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