Annuity sales are rocketing. According to the Association of British Insurers (ABI), they jumped 24% to a 10-year high in 2024 as pensioners seek a stable, guaranteed retirement income. That’s a huge turnaround for a product that saw sales plummet by 75% only a decade ago. But what’s behind this renewed interest, and how can you make the most of what annuities offer?
Why are annuities back in demand?
An annuity is a way to turn your pension savings into a regular, guaranteed income for life or for a set period of time. You won’t have to worry about running out of money if you enjoy decades of retirement.
According to Legal and General, the rise in annuity rates at the end of 2024 meant that with a rate of *6.57%, a 65-year-old man in good health could get an annuity paying £6,570 a year in exchange for £100,000. With an annuity rate of 6.57%, if you live past your 80th birthday you’ll start receiving more in income than you paid for the annuity.
You can also get an index-linked annuity so that your income rises in line with inflation, so your purchasing power isn’t eroded over time. PensionBee’s Inflation Calculator can help you see how your pension could be impacted by inflation.
Buying an annuity can also reduce the amount of investment risk your pension is exposed to in retirement as it won’t be affected by any fluctuations in the stock markets.
Why annuities fell out of favour
The introduction of pension freedoms in 2015 meant savers had more options for how to take their pension. One of those was flexi-access drawdown, which lets you access your pension savings whenever you need to, while reinvesting your remaining funds.
At the same time, a long period of low interest rates and poor returns on government bonds (gilts) meant that the rates being paid on annuities were far from attractive. Insurance companies tend to invest in gilts and fixed interest products to secure the returns they need to pay out annuity incomes. So, when gilt yields and interest rates are low the income offered on annuities also drops.
Back in 2019 annuity rates hit an all-time low. A £10,000 annuity would have paid a 65-year-old just £468 a month, according to MoneyFacts - meaning they would’ve had to live to 86 just to break even.
This is the key problem with annuities – you lock in rates at the time of purchase. If rates are low when you buy you could be lumped with a meagre income for the next 30 years. But smart investors can get around that problem.
How to use annuities wisely
A common criticism of annuities is their lack of flexibility. You hand over a large chunk of your pension pot and in return you get a set income for life or a set period of time. But if interest rates rise after your purchase, you could miss out on better deals.
One option is to stagger your annuity purchases throughout your retirement. Instead of buying one large annuity when you retire, consider purchasing smaller annuities at different stages. This approach has three key benefits:
Reduces investment risk – moving into annuities gradually over time means you slowly remove your pension from the stock market. You don’t have to sell all your investments at once, leaving some invested with the opportunity to continue growing.
Take advantage of rising rates – if interest rates improve you can secure a higher income on an annuity in the future.
Your age could boost your income – as you get older, and if your health changes, you may qualify for an enhanced annuity, which offers a higher return.
You’ll also want to consider the type of annuity you’re buying. A single annuity pays an income only while you’re alive. Whereas a joint life annuity provides an income for your partner if you die first.
Working out how much money you need in retirement
The amount you can get from annuity depends on several factors, such as your age when an annuity is purchased, your health and lifestyle, the size of your pot and whether you want an increasing or fixed level of income.
Begin by adding up your essential housing, bills and food costs and subtract your State Pension, if you’re eligible. This is currently around £11,973 per year (2025/26) if you qualify for the full new State Pension. If you aren’t sure what your State Pension entitlement is, you can check your forecast at GOV.UK.
According to The Pension and Lifetime Savings Association (PLSA) the average minimum you need in retirement (as a single person) is £13,400 (2025/26). If you receive the full new State Pension, you’d need an annuity that pays £1,427 annually to cover the rest.
The PLSA’s Retirement Living Standards were developed to help people visualise retirement at three different income levels. They’re well worth looking at to see what you’d need as a single person, or a couple for a minimum, moderate and comfortable standard of living.
If you purchase an annuity to cover the difference between your State Pension entitlement and the minimum standard, you know you have a guaranteed income to cover the essentials. Or, if you can afford to, you could buy a larger annuity to cover a bit more than the essentials.
Using a mix of withdrawal options in retirement
When it comes to taking money from your pension, you don’t have to stick to just one approach. Depending on your plans and what suits your situation, you can mix and match different options.
For example, you might take a lump sum to pay for a holiday or home improvements, while keeping the rest of your pension invested through drawdown. Or you could start with flexible income from pension drawdown early in retirement, then switch to an annuity later on for a guaranteed income - some people also do this the other way around.
You might also consider whether or not to take Pension Commencement Lump Sum (PCLS) before purchasing an annuity. This is where you take 25% of your pension, as tax-free cash, once you’ve reached age 55 (rising to 57 from 2028). This allowance is per person, not per pension scheme. So the maximum you can take across all of your pension pots is £268,275. If you want to purchase an annuity to guarantee a set level of income, you might decide to do this after taking a PCLS.
Summary
Annuities are enjoying a comeback as a result of a rise in interest rates meaning they can be a valuable part of your retirement income. By staggering your annuity purchases or mixing them with pension drawdown, other savings and your State Pension, you can create a flexible, reliable income. When used wisely, annuities can be a useful part of retirement planning, providing peace of mind and a guaranteed income in your later years.
There are different features to consider and varying types of annuity, and what best fits your needs will depend on your own individual circumstances. If you’re aged 50 and over and want free, impartial guidance, you can book an appointment with Pension Wise. They’ll talk you through your pension options, explain how the tax works and share tips for avoiding scams. You can book an appointment with the government-backed service online via the MoneyHelper website.
Ruth is a Financial Journalist passionate about making money matters clear and accessible. She’s written for The Mail on Sunday, MoneyWeek, The Sun, and Good Housekeeping, helping readers navigate pensions and personal finance with confidence. She believes everyone deserves financial security and is on a mission to cut through jargon and make finance relatable.
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.
