| Higher annuity rates may provide more guaranteed retirement income than was available just a few years ago | Combining an annuity with drawdown can balance income security, investment flexibility and long-term retirement planning objectives | Forthcoming pension Inheritance Tax changes may influence whether guaranteed lifetime income becomes a more attractive retirement strategy |
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In the past, annuities were the most popular way to receive retirement income. But, after the introduction of pension freedoms in 2015, they fell out of favour, with many retirees preferring to draw down their pension income while leaving their funds invested.
However, with recent improvements in annuity rates and major changes to the Inheritance Tax (IHT) regime surrounding pensions due in April 2027, annuities are seeing a revival. Industry figures show annuity sales have risen significantly in recent years as more retirees seek guaranteed income and protection from market volatility.
So, what is an annuity, and how might it be a useful tool for your retirement plan?
What is an annuity?
An annuity is an insurance product that converts some, or all, of your pension pot into a guaranteed income. That income can last for:
- Your lifetime (a lifetime annuity), or
- A fixed number of years (a fixed‑term annuity).
Essentially, you swap your pension pot, or a portion of it, for a predictable, regular payment that arrives no matter how the stock market is performing.
How does an annuity work?
Money from your defined contribution pension pot is used to buy the annuity. In return, the provider pays you a regular income. The amount you receive depends on:
- Your age
- Where you live
- Health and lifestyle (smokers or those with medical conditions may get higher rates known as an ‘enhancement’)
- The type of annuity you choose.
- Current interest rates and gilt yields (the returns on government bonds).
For example, if you have a £100,000 pension pot, a 5% annuity rate would pay £5,000 a year, or a 6% rate annuity would provide you with £6,000 a year.
Types of annuities
Here are some of the most common types of annuities:
- A lifetime annuity provides a guaranteed income for life
- Fixed‑term or short-term annuities provide income for a set period. You might choose to purchase a fixed-term annuity and leave the rest of your pension pot invested if you thought annuity rates may improve in the future, for example
- Level vs inflation‑linked – level annuities pay you the same figure as time goes on, while inflation-linked or ‘escalating’ annuities rise with inflation. Inflation-linked annuity payments are likely to start with lower payments initially compared to level annuities
- Single vs joint life – you can purchase a single or joint life annuity. A joint life annuity will pay continue paying an income to your spouse or partner after you die, usually at a lower level.
You can choose to be paid monthly, annually, every six months or quarterly. Meanwhile, your annuity can also pay out in advance (as soon as you’ve set it up) or in arrears.
Why did annuities decline in popularity?
For years, annuities were the default retirement option. That changed in 2015 when government pension freedoms gave people more flexibility.
Following these changes, drawdown became more popular as a way of taking pension income. With flexible drawdown, your money stays invested in the stock market, but you draw down a portion of the income from it regularly.
You also still retain the option to purchase an annuity at a later date, but once you have bought an annuity with your pension pot, there is no going back.
Historically low interest rates also meant annuity rates were relatively poor, so they became a less attractive option for retirees.
As a result, many opted for flexible drawdown.
Unlike an annuity, the value of investments held in drawdown can fall as well as rise and there is a risk that withdrawals could reduce the sustainability of retirement income.
Why are annuities back in focus?
Recent improvements in annuity rates, the cost-of-living crisis and changes to the way pensions will be treated for IHT purposes from April 2027 are prompting some people to rethink their retirement plans.
Rising interest rates
Higher interest rates have significantly improved annuity rates. In March 2026, average annuity rates rose to 7.62%, according to the Standard Life Annuity Rate Tracker1. This was a rise of 1.46% in Q1 2026 compared to Q4 2025.
Higher annuity rates mean retirees can now secure more income from the same pension pot than they could have achieved during the low-interest-rate environment of the late 2010s and early 2020s.
As such, sales of annuities worth over £250,000 rose 31% in 2025 compared to the previous year and those over £500,000 by 54%, according to the Association of British Insurers2.
Economic uncertainty
Stock market volatility over the last few years following global geopolitical events and trade tensions have also made the prospect of guaranteed annuity income more appealing.
Longevity risk
As people are living longer, a lifetime annuity removes the worry of outliving your savings – something drawdown can’t guarantee.
Together, these factors mean annuities are once again an important tool in retirement income planning.
Pensions and IHT: What’s changing?
In the past, some retirees used pensions as an IHT planning tool. Pension funds were previously not included as part of an individual’s estate after death and were exempt from IHT.
Under current Government proposals, from April 2027 unused pension funds are expected to form part of an individual’s estate for Inheritance Tax purposes, although tax rules may change in future. This means that estates could be subject to IHT at 40% on any pension funds that remain invested over the IHT threshold.
As such, some pension savers may be reconsidering whether keeping large sums in drawdown for inheritance purposes is the right strategy.
Tax treatment depends on individual circumstances and may change in future.
Where annuities fit in:
In contrast, annuities convert pension wealth into income instead of leaving funds invested and the payments usually stop when you die, so they do not form part of an individual’s estate at death.
Annuities can provide more certainty, reduce reliance on volatile stock markets and complement other retirement income sources.
Pros and cons of annuities
Advantages include:
- A guaranteed income for life or a fixed term
- Ease of management
- Protection from market volatility
- Expectation of a higher income if you qualify for enhanced rates for medical reasons.
However, disadvantages are that they tend to be less flexible than drawdown, have limited inheritance value and are irreversible once purchased.
Who might choose an annuity?
An annuity may suit those who prioritise income security, do not want to manage an investment portfolio in retirement or have concerns about market risk.
It doesn’t have to be an ‘either or’ choice between annuities and drawdown. Many people choose a combined approach – using part of their pension to buy an annuity while keeping the remainder of their funds in drawdown for flexibility.
Talk it through with an adviser
With improved rates and economic uncertainty, annuities are becoming an important part of the retirement toolkit once again. They’re not for everyone, but they can offer the peace of mind that comes with a regular income.
As with all retirement decisions, the right choice for you depends entirely on your individual circumstances. Our adviser can help you determine whether an annuity could play a role in your long‑term retirement plan.
1 Standard Life 2026, 2 ABI, 2026
The value of investments can fall as well as rise, so you could get back less than you invest. Income from drawdown is not guaranteed and taking withdrawals may reduce the value of your pension fund. Annuity income is guaranteed once purchased but is generally irreversible and may offer limited flexibility.