The UK annuity market has witnessed a notable upturn, with sales reaching £7.4 billion in 2025—a 4% increase from the previous year. This surge is largely attributed to recent changes in inheritance tax regulations, which have encouraged individuals to reconsider annuities as a viable investment for their retirement savings. With the average annuity purchase now exceeding £80,000, there is a clear shift in consumer attitudes towards this once-overlooked financial product.
Inheritance Tax Changes Fuel Demand
The driving force behind this resurgence can be traced back to announcements made by Rachel Reeves in her October 2024 budget. The government’s plans to amend inheritance tax (IHT) policies concerning pensions will take effect in April 2027. Under these new rules, any remaining funds in defined contribution pensions after an individual’s death will be subject to IHT, significantly altering how pension savers approach their investments.
Previously, many viewed annuities as an unattractive option due to their perceived poor value and lack of flexibility. However, the looming tax implications have prompted a reassessment. Individuals are now keen to mitigate the risk of their hard-earned savings being eroded by tax liabilities upon their death. Clare Moffat from Royal London noted the increasing interest in annuities as a strategic move for inheritance tax planning, suggesting that this trend is likely to continue as the policy changes draw nearer.
Annuities Offer Enhanced Value
In addition to the tax considerations, the financial landscape for annuities has improved markedly. According to research from Fidelity International, a healthy 66-year-old with a pension pot of £300,000 can now secure a single-life annuity yielding approximately £22,440 annually—a remarkable rate of around 7.5%. This is a substantial increase from the rates seen just five years ago, which hovered between 4% and 5%, resulting in annual payments of about £13,500.
The enhanced returns are drawing attention to annuities as a more appealing option for retirees seeking stable income streams in an uncertain economic climate. As individuals weigh their retirement options, many are finding that the guarantees provided by annuities offer a reassuring contrast to the volatility of other investment avenues.
Changing Perceptions of Annuities
Historically, annuities have been perceived as a lacklustre choice for many retirees, particularly following the introduction of pension freedoms in 2015, which allowed individuals greater control over their pension pots. The dramatic fall in demand for annuities post-freedom reflected a widespread sentiment that these products were no longer necessary. However, the combination of favourable market conditions and impending tax changes has fostered a renewed interest in them.
As the public becomes more aware of the potential tax implications of leaving pension funds untouched, the narrative surrounding annuities is evolving. Formerly dismissed as an unworthy investment, they are increasingly viewed as a strategic financial decision that can preserve wealth for future generations.
Why it Matters
The shift in annuity sales reflects broader trends in financial planning and retirement strategies within the UK. As individuals navigate the complexities of inheritance tax and the potential impact on their estates, annuities are emerging as a crucial tool for effective wealth management. This transformation not only highlights the changing landscape of retirement planning but also underscores the importance of responsive policy-making in shaping consumer behaviour in the financial sector. With increasing longevity and the need for reliable income streams, understanding these dynamics will be essential for both savers and financial advisors in the years to come.
