Why annuities have become popular again among retirees

Higher interest rates have increased the allure of annuities, which provide a consistent income in retirement

So, should you use some of your pension funds to purchase an annuity?

It's back: annuities. The annuities market was expected to be destroyed by the 2015 pension-freedom reforms, which greatly facilitated savers' ability to take retirement income straight out of their pension fund.

Annuity sales are on the rise, however, ten years later. Annuities are drawing in more and more savers with larger funds, according to the Association of British Insurers, which reports that pension savers purchased 74 billion of them last year, a 4% increase over 2024.

This was not how it was intended to be. Annuities are not a very flexible product. When you retire, you are locked into the current rates, but they turn your pension funds into a steady income that is guaranteed for the rest of your life.

There is no room for additional investment growth, and you have no remaining pension assets to leave to your descendants.

An income-drawdown plan, on the other hand, allows you to keep investing your pension while taking out cash to support yourself and pass on any remaining funds upon your death. Nonetheless, there are three reasons why more savers are turning back to annuities and refusing drawdown.

Why are retirees going back to their annuities?

First, because annuity rates are directly correlated with interest rates and gilt yields, which have been rising, they have become much more generous in recent years.

Now, if a 65-year-old man is in good health, a £100,000 pension fund would buy him about £7,700 annually.

Five years prior, when annuity rates were at their lowest, that amount was only £4,900 annually.

Second, if you're managing a pension fund later in life, the heightened political and economic uncertainty is even more unnerving.

With drawdown plans, you are continuously attempting to determine how much income you can take out while maintaining the confidence that your funds will last for the necessary amount of time.

It's a challenging task because you have no idea how long you'll live or what returns your pension fund will generate. Furthermore, it seems even more difficult during turbulent times.

Annuities, on the other hand, offer stability and security.

The third factor is the evolving inheritance tax regulations.

At the moment, pension assets left to your heirs typically do not count toward the estate's value for inheritance tax (IHT) purposes. However, that won't be the case starting in April 2027.

You may be leaving your heirs with an IHT burden as a result of your generous bequest of pension assets.

If so, an annuitywhere you don't have to give away any unused moneymight be a better choice for everyone.

In light of this, a lot more saversincluding those who would have been deemed ideal candidates for income-drawdown plans in the pastare drawn to annuities.

It also helps that providers are now more creative, creating new annuity types that address some of the issues that have historically been related to the products.

Even so, it's more crucial than ever to abide by the golden rule when purchasing an annuity: never just purchase the annuity that the pension provider where your savings are invested is offering.

The prices and, increasingly, the product design of each provider differ greatly.

Your retirement income can significantly change if you seek financial advice before purchasing an annuity.

In addition to helping you locate the best rates, a specialist will counsel you on the best kind of annuity.

People who are perceived as having poorer health, for instance, may be eligible for higher rates from certain providers. This could simply mean that you are slightly overweight, have smoked recently, or even work in a risky profession.