Annuities are quietly coming back

Should they play a role in your plan?

For nearly a decade, annuities were out of fashion. Rock-bottom interest rates and new pension freedoms meant that locking into a guaranteed income felt restrictive compared to the flexibility of drawdown. But as the latest Financial Conduct Authority (FCA) data shows, annuities are quietly staging a comeback, and for good reason.

When reading this article, please bear in mind that tax treatment depends on your circumstances and is subject to change.

What the FCA data tells us

According to the FCA’s 2024/25 Retirement Income Market Data, annuity sales rose by 7.8% compared with the previous year. After years of decline, this is the second consecutive annual increase¹. We believe that rising interest rates, stronger annuity rates, and increased awareness of longevity risk, the risk of outliving your savings, are all playing a part in this renewed interest.

For many, annuities are no longer the ‘poor value’ product they were once seen to be. The return of higher long-term interest rates has changed the picture dramatically.

Why rates matter so much

Annuity pricing is closely linked to long-term gilt yields — the interest rates at which the UK government borrows. When those yields were near zero, annuity providers could only offer modest incomes.

Today, things look very different:

• Ten-year gilt yields are currently around 4.5%, compared with just over 0.1% in January 2020²
• As a result, 2025 annuity rates are over 60% higher than they were in 2020³

To put that into context, recent data shows:

Standard Life’s Annuity Tracker (May 2025) reported an average rate of 7.72% for a healthy 65-year-old, equivalent to about £7,720 per year on a £100,000 pension⁴.

By comparison, the same annuity in July 2020 might have produced around just £4,710 per year³.

In short, higher long-term interest rates have transformed annuity value: the same pension fund can now buy a significantly larger guaranteed income for life.

The appeal of guaranteed income

One of the biggest challenges in retirement planning is balancing flexibility with certainty. Drawdown offers control and growth potential but carries investment risk and the possibility of running out of money.

An annuity does the opposite. It removes uncertainty by paying a guaranteed income for life, regardless of how long you live or how markets perform.

For many people, the ideal approach is a blend of both. Use part of your pension to secure essential spending, the bills that must be paid, and leave the rest invested to provide flexibility and growth.

This core and explore approach helps maintain peace of mind while still allowing scope to benefit from how markets work.

Types of annuity explained

To understand where annuities might work for you, it helps to know the main types available:

1. Single-life vs joint-life: a single-life annuity stops on your death. A joint-life annuity continues to pay part or all of the income to your spouse or partner.
2. Level vs escalating: a level annuity pays the same income every year. An escalating (or index-linked) annuity increases each year, typically by a fixed percentage or in line with inflation.
3. Guaranteed period: you can choose to have your income guaranteed for, say, five or ten years. If you die within that period, payments continue to your estate or dependants.
4. Enhanced annuity: if you have certain health conditions, smoke, or have lifestyle factors that might shorten life expectancy, providers may offer a higher income.

The new interest rate environment

The last time annuities looked attractive, base rates were above 4%. For nearly 15 years after the 2008 financial crisis, rates hovered close to zero, and annuity payouts reflected that.

Now, the Bank of England’s base rate is 4.0%⁵, and long-term yields remain elevated. Even if rates fall slightly, most analysts expect them to settle higher than in the previous decade.

That means the improved annuity rates we see today may be here to stay, at least in relative terms. Higher rates also have another benefit: they reduce the cost to insurers of providing long-term guarantees, making annuities more sustainable as products.

When an annuity might make sense

While annuities aren’t right for everyone, there are several situations where they can play a valuable role:

• Covering essential spending: securing income for core expenses such as utilities, food, and council tax.
• Longevity protection: ensuring income continues even if you live longer than expected.
• Simplifying retirement income: reducing the need to monitor markets or make ongoing investment decisions.
• Providing peace of mind for a partner: a joint-life annuity can ensure financial continuity for a surviving spouse.
• Health or lifestyle factors: if you qualify for an enhanced rate, the uplift can be significant.

When flexibility may still win

For others, retaining investment flexibility and the potential for growth through drawdown may still be more suitable. This is particularly true if you have:

• other sources of guaranteed income, such as the State Pension or defined benefit schemes
• a larger pension pot where flexibility is more valuable
• capacity to accept market risk and a longer investment horizon
• the desire to manage income tax more precisely year by year

That’s why it’s rarely a question of annuity or drawdown, it’s often annuity and drawdown, in balance.

The value of advice

The FCA data also shows that only around 30% of people take financial advice before accessing their pensions. Yet annuity rates, taxation, and withdrawal strategies can be complex – and mistakes are often irreversible.

A regulated adviser can:

• compare annuity quotes across the whole market
• assess whether partial annuitisation (using only part of your pot) fits your goals
• integrate annuity income into a wider retirement plan, alongside drawdown and ISAs
• ensure any decisions are made in the right tax year to avoid unintended higher-rate charges

Even for those who prefer flexibility, knowing the guaranteed income an annuity could provide helps clarify how much risk you truly need to take with the rest.

Things to watch

Annuities are stronger value today, but there are still points to consider:

• Once bought, they generally cannot be changed — so ensure the structure suits your needs before committing.
• Inflation protection costs more upfront.
• If rates rise further after purchase, you won’t benefit retrospectively.
• Health and lifestyle changes after purchase can’t be re-underwritten.

These aren’t reasons to avoid annuities, simply reminders to review options carefully before signing on the dotted line.

The bottom line

After years in the shadows, annuities are enjoying a well-deserved revival. Rising interest rates, better value, and renewed awareness of longevity risk mean they now deserve a second look.

They’re not for everyone, but for many, combining a guaranteed income with flexible investments can deliver the best of both worlds: security where you need it, and freedom where you want it.

The key is not whether annuities are back, but whether they fit your personal plan. With the right advice, they can form a solid foundation for lasting retirement peace of mind.

Taking pension money early is not right for everyone as it will leave you worse off in retirement. Also, tax treatment depends on your circumstances and is subject to change. That’s why it makes sense to get help from a regulated specialist.