According to data provided by Just Group and reported in Professional Adviser, annuity rates in the UK reached a 15-year high in the first quarter of 2025. Increased interest rates mean that annuity rates are now 70% higher than they were just four years ago.
That news alone may well be enough for you to consider annuities as part of your retirement income strategy.
Additionally, in the 2024 Budget, the chancellor confirmed that, from 2027, pension funds will be included in your estate for Inheritance Tax (IHT) purposes. This provides another strong reason why you might want to think about using annuities as an income option.
Read on to find out why, and how you could incorporate annuities into your retirement income planning.
Annuity sales declined as a result of a long period of low interest rates
For many years, buying an annuity with the value of your accrued pension fund was the standard way to provide you with an income in retirement. In fact, up until 2011, it was compulsory to do so when you reached age 75.
The advantage provided by an annuity is a guaranteed income for a set period – often for life – with the option to link it to inflation. So, they can provide certainty of income and reassurance for retirees.
However, the removal of that requirement, together with Pension Freedoms legislation in 2015, changed the retirement income landscape dramatically.
Flexibility of income became all-important for people retiring.
This, added to a long period of low interest rates after the financial crash in 2008, meant that annual annuity sales declined from 420,000 in 2012 to a low of under 60,000 in 2021, according to Which? figures.
But now, increasing annuity rates and an element of stock-market uncertainty mean that annuities started seeing a revival in 2024, with the ABI reporting sales of £7 billion.
The certainty of income can make annuities a valuable retirement option
The key benefit of using annuities has not changed in the years they have been an available option.
By purchasing one, you can create certainty of income for the rest of your life. While this might not be enough to fund your lifestyle by itself, this income could underpin your other sources, such as remaining pension funds and your UK State Pension.
You also have the option to include spouse’s benefit, so income will continue to be paid to your partner if you pass away before them.
Annuity rates will determine how much income you can purchase with a lump sum from your pension fund. Shopping around can help you get the best possible rate from the various annuity providers in the market.
Additionally, if you have any underlying health issues, such as diabetes or asthma, you may be eligible for an enhanced annuity, which could provide you with a better rate.
An important point to remember is that you are not obliged to use your entire pension fund to purchase an annuity. Instead, you can use annuities tactically alongside other income options to provide an element of guaranteed income, while also retaining the option to enjoy potential investment growth on the remainder of your fund.
Using annuities to reduce your Inheritance Tax liability
As well as improving rates, the second good reason to consider the use of annuities as part of your retirement planning relates to IHT.
From 2011, putting money into pension funds was a highly tax-efficient way to shelter substantial sums from IHT. It meant that when you passed away, your fund could pass to your beneficiaries with no IHT being liable.
From April 2027, that will change, and your pension fund could become liable for IHT. This means that you may need to review both your retirement income and IHT planning arrangements.
One possible option to consider is to use your pension fund to buy an annuity to provide an income for yourself. After all, this is what pensions were originally designed for.
In doing so, you will effectively spend those pension funds and remove them from your estate, potentially reducing an IHT bill for your loved ones.
Combined, this could help you fulfil two financial planning objectives – a guaranteed income and reducing your IHT liability – at the same time.
An annuity may not be the right option for you
Even though annuity rates are currently higher than they have been previously, it’s important to be aware that buying one may not be the right retirement strategy for you.
For one thing, it’s an irreversible decision, and it could mean you miss out on investment growth that you would have enjoyed had you kept your fund invested.
Additionally, with regard to your IHT planning, your personal financial circumstances may mean that there are more effective ways to mitigate your liability, especially if you have other assets.
We would strongly recommend that you get expert financial advice when you are considering your retirement income and estate planning options.
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If you would like to talk about your own retirement income planning, please get in touch with us.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only, it does not take into account your personal objectives, financial situation, or needs.
Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances.
All contents are based on our understanding of HMRC legislation, which is subject to change.