Sales of annuities surged by 20% in 2024, reaching a total of £7 billion, as pensioners sought to protect their savings from upcoming changes to inheritance tax rules. The rise in demand follows the October Budget announcement, which outlined plans to bring pensions into the scope of inheritance tax from 2027.
Annuities, which convert pension savings into a guaranteed income for life or a fixed period, have become an increasingly attractive option for pensioners looking to safeguard their wealth. With rising interest rates boosting annuity payouts, many savers are now opting to access their pension funds sooner rather than later.
Why Are Pensioners Turning to Annuities?
The recent budget changes have sparked concern among wealthier retirees, who now face the possibility that unused pension savings could be subject to inheritance tax after 2027. Previously, money left in a pension was generally exempt, allowing retirees to pass on their remaining savings tax-free. However, under the new rules, unspent pension wealth could become taxable upon inheritance, prompting many savers to reconsider their financial strategy.
Pete Cowell, head of annuities at Standard Life, explained the shift in behaviour:
“We anticipate demand for annuities will remain strong, particularly with changes from the October Budget bringing pensions into scope for inheritance tax from 2027. The change is likely to encourage wealthier savers to access more of their pensions, and annuities are proving an attractive way of doing so.”
By converting pension savings into an annuity, individuals can ensure that their funds are used for income rather than being left exposed to inheritance tax liabilities. This financial planning strategy is expected to become increasingly popular in the coming years.
Better Annuity Rates Driving Demand
Aside from tax concerns, another major factor influencing annuity purchases is the recent rise in annuity rates, which has made them a more lucrative option for pensioners seeking financial security.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, highlighted how higher interest rates have improved annuity returns:
“Rising interest rates and soaring gilt yields have meant annuity rates have risen, and people are getting more income for their money.”
For example, the latest data from Hargreaves Lansdown’s annuity search engine shows that:
- A 65-year-old with a £100,000 pension can now secure an income of up to £7,490 per year through a single-life annuity with a five-year guarantee.
- The current annuity rate for a healthy 65-year-old stands at 7.2%, while for a 70-year-old, it rises to 8.2%.
These improved rates mean that annuities are now delivering stronger returns than in previous years, making them an attractive choice for pensioners seeking guaranteed income.
More Savers Shopping Around for the Best Deals
Alongside the surge in annuity purchases, there has been a significant increase in retirees shopping around for better deals, rather than simply opting for the annuity offered by their existing pension provider.
According to the Association of British Insurers (ABI):
- 69% of retirees in 2024 switched to a different provider when purchasing an annuity, up from 64% the previous year.
- 36% of annuity buyers sought financial advice, compared to 29% in 2023, reflecting a growing awareness of the importance of choosing the right annuity option.
Stephen Lowe, communications director at Just Group, sees this trend as a positive step for retirees:
“The upward trend in people taking financial advice when buying an annuity – to 36% in 2024 compared to 29% the previous year – is very positive. The figures released by the ABI today show consumers are increasingly heeding the message to shop around and not take the deal offered by their existing pension provider.”
By seeking enhanced annuity rates, which offer higher payouts based on health conditions and lifestyle factors, retirees can maximise their income and secure better financial stability in retirement.
Is an Annuity the Right Choice for All Pensioners?
While annuities offer guaranteed income and protection from inheritance tax, they may not be the best option for every retiree. Some individuals may prefer to keep their pension invested and draw down funds flexibly rather than committing to a fixed income for life.
However, with annuity rates at their highest in years and changes to pension taxation on the horizon, many pensioners are now seeing annuities as a valuable tool for financial security.
As 2027 approaches, financial advisors expect that even more retirees will consider annuities, ensuring their pension savings are maximised for income rather than left vulnerable to tax liabilities.
