Why have annuity purchases been increasing?

Charles Kelton

by , Product copywriter

at PensionBee

21 Feb 2023 /  

Elderly couple smiling and drinking tea with a laptop in front of them.

Annuity rates are currently at their highest since 2009, which has once again made them an appealing choice for those considering how to make the most of their pension savings in retirement.

An annuity enables you to use your pension savings to provide you with a regular guaranteed income in retirement, usually paid out over a predetermined period of time or for the rest of your life. There are a few different types of annuities, including enhanced annuities, which typically offer higher rates to individuals with certain health conditions, and escalating annuities which increase at a fixed rate each year or in line with inflation.

Annuities were once a common way for those at retirement age, currently, 55 (rising to 57 from 2028), to convert their pension savings into a retirement income. However, annuity purchases have seen a decline following government reforms to pensions in 2015, which gave those at retirement age increased control over how to take their pensions. This included the introduction of pension drawdown. Drawdown allows those at retirement age to withdraw income from their pension pot as and when they need it whilst leaving the rest invested. However, there’s been a resurgence in the popularity of annuities over the course of 2022 due to rising rates.

The main driver of annuity purchases over the past year has been the rise in interest rates. With the UK economy seeing soaring inflation, the Bank of England has been raising its base rate, which is currently at 4%, in an attempt to curb inflation’s continued upward creep. And there may be a further increase in interest rates in 2023 with some predictions that they could reach 4.4% by July. Whilst rising interest rates impact the affordability of some financial products and services, such as mortgages, they have a positive effect in other ways such as increasing the rates on savings products as well as annuities. And a higher annuity rate generally means a higher income in retirement.

Higher interest rates make annuities a particularly attractive option for retirement income as they allow you to lock in the rate offered at the time you purchase it, for the length of your annuity term. This provides a level of security for your income in a period of market volatility and provides a more predictable level of guaranteed income compared to the relative uncertainty of investment products.

Is an annuity right for me?

Rising interest rates certainly make annuities a more attractive way to draw your retirement income, however, there are a number of factors worth considering when deciding if an annuity’s right for you.

Age and health

Generally, the shorter your life expectancy the higher your annuity payments will be. So, the older you are when you take out an annuity the higher the rates you usually receive compared to buying an annuity when you’re younger. It’s a similar situation when it comes to your health, if you have a particular medical condition you may be able to get an enhanced annuity offering a higher rate.


Whilst you may benefit from having a more stable regular income, annuities lack flexibility. As you lock in the annuity rate at the time you purchase it, should interest rates rise, you won’t be able to move your annuity to take advantage of higher rates.

Income needs in retirement

Your income needs may change as you enter retirement or take semi-retirement. It’s important to consider how much you’ll need to support yourself and your family. Your circumstances may change over time but your annuity rate will remain the same.

Combining an annuity with drawdown

When comparing annuities and drawdown it can often seem like a choice between one or the other. However, you can combine the two approaches. Doing so can allow you to take advantage of the benefits each offer.

You could use a portion of your pension to purchase an annuity, giving you a regular and predictable income whilst leaving the rest invested from which to draw down variable amounts as you decide. Additionally, leaving some of your pension invested allows that portion the possibility of growing over the long term. Considering your personal circumstances, this could mean using an annuity to cover certain regular costs and then using drawdown to take additional income as you want for any other costs.

Read more about the differences between annuities and drawdown.

Purchasing an annuity

If you’re considering an annuity, it’s worth shopping around for the best rates. Your current pension provider may also offer annuities but you may find preferable rates elsewhere. Like all financial products, how much you can get can vary among providers.

PensionBee has partnered with Legal & General where you can get a free annuity quote. You’ll simply need to provide some information about yourself, such as your pension savings and your health, and they’ll search the whole market to get you the best available quote. Learn more about getting a quote through Legal & General.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice

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