Annuities back in vogue

The introduction of ‘pension freedoms’ saw annuities fall out of fashion. Back in 2015, the government concluded that the annuities market was “currently not working in the best interests of all consumers. It was neither competitive nor innovative and some consumers were getting a poor deal.”¹

The introduction of ‘pension freedoms’, which saw the rules around drawdown significantly relaxed, meant that this quickly became the go-to choice for many as they looked to prepare for and manage their retirement. While 75% of defined contribution pensions were used to buy an annuity before 2015², this fell off sharply in the years following the change, with most DC pots being accessed pre -65. 

The tide, however, appears to be turning. Data from the ABI revealed that 2023 was a milestone year for annuity sales which totalled £5.2 billion according to the ABI - a 46% increase on 2022³. This trend continued in 2024 with sales of pension annuity contracts jumping a further 24%⁴.

The quest for certainty

There are numerous benefits to utilising an annuity as a core part of later life planning. Top of the list for many is the certainty that it can offer, providing a guaranteed income for the remaining lifetime. It also takes away the worry of investment risk, insulating the retirement pot from the volatility of global equity markets.  

Contrary to many people’s perception, these products can also provide valuable features. Whether driven by the expectation of escalating costs of older age or hesitant about the corrosive power of inflation, clients are able to have the amount they receive increase over time in line with inflation or increase as a defined percentage.  

There is the additional ability to add protections to the policy so that payments are protected for a dependent for a set period of time after death, either through a dependants’ benefit or a guarantee period.

Managing the IHT conundrum

More attractive rates have undoubtedly played their part in bringing annuities back into the zeitgeist. But changes in the IHT policy environment will likely play a key role in maintaining this momentum. 

It was announced in the Autumn 2024 Budget that as of April 2027, pensions will no longer be exempt from inheritance tax. While this will include funds paid out as a lump sum, beneficiary’s drawdown, or an annuity, the latter can also play a crucial role when looking to mitigate the impact that these changes may have on wealth planning. 

• Reducing IHT liability: By transferring a pension pot into income, it enables these savings to be more freely spent rather than be caught in the IHT net. 
• Funding protection: For those in a position to not necessarily need all of this surplus income, this money can also be used to fund a protection product as a vehicle to leave a more substantial financial legacy. 
• Enabling regular gifting: The additional income from an annuity could also be the catalyst for establishing a settled pattern of giving, distributing wealth efficiently over the course of later life.

Importance of taking advice

A fluctuating financial and political environment, combined with complex products with a vast array of variations available, mean that the role of the adviser is key.  

Firstly, advisers will need to work closely with clients to identify their financial needs and aspirations to ensure that the goal is clear and agreed. But there is also a notable requirement for an element of education when it comes to the products on hand.  

Annuities in particular are a blind spot for many clients. In fact, among those for whom an annuity might be part of the solution, awareness of their benefits are still low. According to the FCA’s 2024 Financial Lives Survey, just over one in five (22%) of DC pension holders who were planning to access their DC pension in the next 2 years said they’d never heard of a single life annuity. The same percentage (22%) of adults who had accessed a DC pension in the previous 4 years had not heard of a single life annuity⁵.  

Furthermore, ABI data also shows that more annuity purchases occurred after taking financial advice in 2024, with 36% of buyers taking advice beforehand compared to 29% in 2023⁶. 

The Government’s IHT and pension changes have only increased the importance that annuities can play in robust later-life planning. But only when clients properly understand the benefits and risks of the options planning routes available can advisers confidently recommend and settle on a solution.  

There remains a lot of work to be done to help increase awareness and understanding of annuities as a wealth planning solution, so for those advisers who might have fallen out of the annuity habit, reacquainting themselves of the new landscape will ensure that they can confidently have those more complex conversations.

Sources:

¹HM Treasury, Freedom and choice in pensions, March 2014 (PDF, 421KB)

²HM Treasury, Freedom and choice in pensions, March 2014 (PDF, 421KB)

³ABI, 2023 sets new post-pension freedoms record for annuity sales, February 2024

⁴ABI, Another post-pension freedoms record for annuity sales, February 2025

⁵FCA Financial Lives Survey 2024 - Pensions, May 2025 (PDF, 1MB)

⁶ABI, Another post-pension freedoms record for annuity sales, February 2025