After years of being the only thing available for most pension savers, annuities were shunned when rates plunged and more flexible options came along. Now, in the wake of rising interest rates and looming inheritance tax changes, they’re back.

Financial advisers say that clients are using them not just for their traditional use of providing a guaranteed retirement income, safe from the fluctuations of the stock market, but also as a smart way to protect their family wealth from the taxman.

Annuities fell out of favour after 2015, when George Osborne’s so-called pension freedoms gave savers more control over their retirement pots. Before then, anyone with a defined contribution (DC) pension (as opposed to defined benefit schemes, also known as final salary pensions) had little choice but to use their pot to buy an annuity, unless their savings were very small.

An annuity is an insurance product that provides an income for life in exchange for a lump sum. The amount of income you get depends on the annuity rate, which in turn depends on your age, health and the wider annuity market.

They started to lose appeal because Osborne’s freedoms came at a time when interest rates were near zero and annuity rates were at miserable levels. Locking in for life meant poor value: a £100,000 pot might buy you an income of £4,500 a year.

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Given the option, many savers shunned annuities, choosing to leave their pot invested and take income from it when necessary (known as drawdown). Others took their pots as lump sums, despite the hefty tax bills.

By the end of the decade, annuities had become, in the words of the former pensions minister Steve Webb, “the ugly duckling of retirement planning”— bought mainly by the most risk-averse or those without the stomach for stock market volatility.

The comeback

That all began to change in 2022 as interest rates rose sharply. Higher gilt yields, which underpin most annuities, pushed up the income you could get to levels not seen in years. Standard Life said that average annuity rates hit 7.72 per cent in May this year, compared with 4.71 per cent in July 2020.

Figures from the investment giant Hargreaves Lansdown show that the average amount used to buy an annuity has gone up 160 per cent in just four years — from £62,301 in the first half of 2021 to £162,729 in the first half of 2025. The firm said that 2024 was the strongest year for annuities since the pension freedoms were introduced.

“The popularity of annuities continues to soar,” said Helen Morrissey, the head of retirement analysis at Hargreaves. “The values on offer are appealing to a greater range of people and fly in the face of the idea that bigger pension pots should automatically go into drawdown. A 65-year-old with £100,000 in their pension pot can now get up to £7,793 a year — close to all-time highs and a vast improvement on the £4,943 available in August 2021.”

Phoenix Group, the UK’s largest long-term savings firm, says that the share of annuities being sold through financial advisers has gone from about one in five to about three in five as they are recommended as part of a mix-and-match approach to retirement planning. Savers are keeping some of their pot invested to benefit from stock market gains and using the rest to buy annuities to cover “heating and eating” — the essential bills.

A weapon against inheritance tax

Annuities also offer a way around imminent changes to the inheritance tax rules. At the moment, your pension pot can be passed on free of inheritance tax. If you die before you are 75 the recipient of your pot won’t have to pay income tax on withdrawals either.

From April 2027, however, defined contribution pension pots will be included in your estate for inheritance tax purposes, meaning your beneficiaries could lose 40 per cent of your savings to tax so many savers could be looking to reduce the size of their pot.

Annuities offer a way to give away some of your pot during your lifetime through the “gifts from surplus income” rule. This allows you to make regular gifts from your pay or pension income without worrying that those gifts will later be counted for inheritance tax. The gifts have to be money that you do not need and cannot affect your standard of living, and you need to keep records.

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Say you had an annuity that paid you £15,000 a year, but your state pension and other savings meant that you were regularly not spending £6,000 of that annuity income, you could give a grandchild £500 a month to help with their rent or mortgage.

“This could be a powerful way to reduce the size of an estate without triggering the new inheritance tax charge on pensions,” Steve Burley from the advisory firm BFS Wealth and Protection said “The penny hasn’t dropped with everyone yet, but when it does, I expect a lot more interest in using annuities as a tool to beat inheritance tax.”

Dan Gallon from the Association of British Insurers (ABI), said: “The increase in demand for annuity products since 2023 has been largely driven by higher rates, and it’s encouraging to see more taking advantage of the long-term financial security they provide.

“Charging inheritance tax on pensions will bring a number of challenges into an already complicated pensions landscape, so it will be even more vital that support is available to help people make the right decision.”

Why now is a good time to buy

Burley said he is seeing interest from cautious investors in their late 60s who want to lock in secure income early, as well as wealthier clients with inheritance tax concerns.

Morrissey said: “Savers on the lookout for an element of guaranteed income in their retirement planning are deciding that now is the time to lock in,” she said.

Annuities have evolved. Products have more features, can last up to 30 years, have more flexibility, and you can apply online. The Standard Life Guaranteed Lifetime Income Plan, for example, allows you to add a lifetime income to a drawdown arrangement, blending security with flexibility and taking care of all the paperwork for you.

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As well as lifetime annuities, which pay out a guaranteed sum for life and can be inflation-linked, which will generally cost you more, there are fixed-term annuities, where you get a guaranteed income for a set period, say ten years. At the end of the ten years, you get your lump sum back plus investment growth, minus the payments you have received. You can get fixed-term products that will pay out to a spouse if you die before the term is up. This flexibility, said Burley, is attracting clients who would once have dismissed annuities outright.

“It gives people guarantees along with the option to pass wealth on to heirs,” said Burley. “You can even switch later into a lifetime annuity. People want the best of both worlds: guaranteed income and flexibility. Right now, annuities are finally in a place where they can deliver that.”

Burley said: “The last 12 to 18 months have transformed the market. Over the past 10 to 15 years annuities were poor value but now the income they can pay out is far more attractive.”

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Morrissey recommends doing your homework: “Once bought, an annuity cannot be unwound. Think carefully about whether you need joint-life cover, how you’ll protect against inflation, and shop around for the best rate. If you opt for the first quote you’re given, you could miss out on thousands of pounds over the course of retirement.”

Webb, now a partner at the consultancy LCP, said: “For many years annuities have been an unloved product, but are now enjoying a renaissance. Improved rates make the product seem a better deal, and a desire for certainty in the face of market volatility has helped. And now that annuities could be part of a strategy for passing on wealth to the next generation free of inheritance tax, the days of the annuity could be here to stay.”