Annuities have hit record highs as sales reached £7bn in 2024, latest data from Hargreaves Lansdown has shown. Today, 65-year-olds with a pension worth £100,000 can access up to £7,639 per year guaranteed for five years from a “single life level” annuity, a type of annuity that pays out the same level of income every year for the entire duration of a person’s life.
That’s the highest the annuity market has been since December 2008, when it peaked at £7,646. After that, low interest rates following the financial crisis have kept annuity rates down, reaching rock bottom after the Brexit vote.
But higher interest rates have stimulated the market since then and pushed even higher by the 2022 mini-Budget, explained Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.
“It’s a reversal of fortune for a market that many thought had been all but killed off by a combination of rock-bottom interest rates and the freedom of choice reforms,” she said.
Freedom of choice was introduced in 2015 and gave individuals aged 55 and over more flexibility in accessing their defined contribution pension savings, allowing them to choose how to withdraw their pension money instead of being obligated to purchase an annuity.
Incomes have climbed in recent years as interest rates have risen, leading to a renaissance for annuities. The Association of British Insurers recently hailed 2024 as a bumper year for the retirement vehicle with sales of £7bn – “a momentum that will continue into 2025 as people mull the best option for securing a guaranteed income in retirement”, said Morrissey.
But savers must consider their options carefully as, once bought, an annuity cannot be unwound.
“When faced with a list of quotes, it’s tempting to just take the one offering the highest income. However, it’s a decision you or your loved ones may come to regret,” Morrissey warned.
“For instance, single-life annuities offer higher incomes than joint-life ones, but the latter will offer an income to your spouse should you die first. If you opt for the single-life version, then your partner could be left with nothing if you die before them. If you act in haste, you may find you are repenting at leisure if you don’t get the right type of product for your needs.”
The analyst recommended to shop around with the several types of annuities and providers – for example, inflation-linked annuities offer an income that grows over time and could be worth considering but will come with a lower starting income.
“You could be retired for 20 years or more and if you opt for a level annuity at outset then you might find its purchasing power nibbled away by inflation over time,” she said.
The latest data from the Hargreaves Lansdown annuity search engine shows a 65-year-old can get up to £5,418 per year from an annuity that grows 3% per year. That income will grow but it could take a decade for it to match what a fixed annuity.
Annuities have become more popular with independent financial advisors as well, with over two thirds advising their clients to increase the level of in income they take in retirement, according to new research from Standard Life, part of Phoenix Group.
Claire Altman, managing director of individual retirement at the firm, explained advisers traditionally used a benchmark of 4% for client pension withdrawals each year, but found it “striking” that they are now advising an additional 4% on average, with significant numbers recommending an additional 5%, including from annuities.
“In addition to increasing withdrawal rates for those in drawdown, advisers are also considering other means of taking an income and are turning to annuities in increasing numbers due to a combination of the certainty they provide and the attractive rates on offer,” she said.
David Hunter, wealth planner at Succession Wealth, highlighted a few benefits of annuities, including shielding buyers from stock market fluctuations and ensuring a steady income regardless of economic conditions; a higher income paid in case of health or lifestyle that may shorten one’s lifespan; and different payment frequencies to tailor the annuity to specific needs.
At the same time, potential downsides include lower returns compared to other investment options; the cost of inflation protection and the possibility of not receiving the full value of investment in case of an early death.
The benefits of annuities or income investments depend on an individual’s needs and whether they prioritise certainty or flexibility, said Morrissey.