Why annuities are returning to retirement planning
Retirement-funding behaviours have shifted in recent years with annuities staging a comeback.
Over the 2010s these products, which pay a guaranteed income for life, had fallen out of fashion with retirees due to the low rates on offer.
The advent of higher interest rates has pushed up annuity rates making them a more attractive option. Last year saw £7.4bn of pension savings being used to secure an annuity income – the highest level since pension freedom rules were announced in 2014.1
Pros and cons
Annuities offer peace of mind by guaranteeing a regular income for retirees from their pension, no matter how long they live. However, these products are inflexible: once you have bought an annuity with your pension fund, you can’t switch providers or unwind the product. There is also the risk that if you die early, the total income received may be less than the amount paid for the annuity.
One of the other downsides is that level annuities — the most commonly bought contract — pay a fixed income that does not increase over time. This means the value of the income can be eroded by inflation, particularly if this income is paid over a retirement that might last for 25 or 30-plus years.
However, sales of ‘escalating’ annuities have risen 10% from 2024 to 2025.1 These annuities increase the income annually, either by a fixed amount, or in line with inflation. However, escalating annuities cost more than level annuities and usually start with a lower initial income.
Those considering annuity options should also think about whether they need a single or a joint-life annuity. The latter pays out a reduced income (typically 50%) to a surviving spouse or civil partner. Purchasers may also want to look at enhanced or ‘impaired life’ options – which pay a higher income to those with existing health problems or ‘lifestyle’ factors which may indicate a shorter life expectancy, such as smoking.
Turning accumulated savings and investments into an income in retirement can be a complex decision. From April 2027, the value of unused pension funds will be included in inheritance tax calculations, which may affect how people choose to use their savings pots in retirement. There has been a sizeable increase in the number of people converting larger pension funds to annuities, which may be driven by changing tax rules.1
If you’re weighing up the pros and cons of annuities, remember that this need not be an all-or-nothing decision. It is possible to take a mix-and-match approach, buying an annuity with part of your retirement savings while keeping the balance in more flexible drawdown. Alternatively, some people may wish to stick with drawdown in the earlier years of retirement before looking to secure a regular income at a later date.
As ever, expert advice is advisable as purchasing an annuity may not be suitable for everyone.
Annuities are long-term, complex financial instruments that may not be suitable for all investors. The information in this material is for informational purposes only and is not financial advice. All investments carry risk, and annuities are no exception. The performance of an annuity is not guaranteed and can be affected by market conditions and other factors. It is essential to carefully consider your financial situation, investment objectives, and the product’s fees and restrictions before purchasing an annuity.
The value of your investment, and the income from it, 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.
Occupational pension schemes are regulated by The Pensions Regulator.
The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.
Source
May Bulletin 2026
This insight is part of our May Bulletin 2026. Explore all the articles:
