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For about a decade, mentioning annuities in a retirement meeting was a good way to watch someone's face fall. The pension freedoms of 2015 arrived just as annuity rates were near their lowest, and a generation of retirees concluded, not unreasonably, that handing a pension pot to an insurer in exchange for a modest income for life was a poor bargain. Drawdown became the default, and annuities became the thing your parents did.
That has turned around. Higher gilt yields have fed straight through into annuity pricing, and the figures from the Association of British Insurers show individual annuity premiums reaching £7.4 billion in 2025, the highest annual level since the freedoms were announced. The average annuity purchase passed £80,000 for the first time. People are not just buying them again, they are buying them with bigger pots.
What you are actually buying
An annuity is a contract with an insurance company. You hand over a lump sum from your pension and the insurer pays you an income, either for the rest of your life or for a fixed term. A lifetime annuity keeps paying however long you live, which is the whole point of it: it removes the risk of outliving your money, which is the risk that keeps retired people awake. A fixed term version pays for a set period and may leave a residual amount at the end, which can bridge a gap between stopping work and the State Pension starting.
You can shape it at the outset, and this is where the decisions bite. A guarantee period keeps the income running for a set number of years even if you die early. A dependant's option continues a proportion of the income to a spouse or partner after your death. Escalating income rises each year, either at a fixed rate or in line with inflation, which protects your buying power over a long retirement. Every one of those features costs you something in starting income, and once the cancellation period has passed an annuity generally cannot be changed.
The part that is genuinely new
Something has shifted in the background that is worth understanding. From 6 April 2027, most unused pension funds and lump sum death benefits will be counted as part of your estate for inheritance tax. For years, a defined contribution pension left untouched was one of the most efficient things you could pass on. From that date it will usually sit inside the estate alongside everything else, and the nil rate band has been frozen at £325,000 until April 2031.
An annuity is treated differently, because the money has been exchanged for an income rather than left sitting as a fund. That does not make annuitising an inheritance tax strategy, and it should not be treated as one. What it does mean is that the comparison between drawdown and annuity now has a dimension it did not have three years ago, and anyone who chose drawdown partly on death benefit grounds may find the reasoning has moved underneath them.
Take Malcolm, 67, a fictional client in a position that is becoming common. He has a pension pot of around £300,000, a full State Pension, and a wife who has very little pension of her own. His worry is not investment returns, it is that she is left short if he goes first and markets are down. Using part of the pot to buy an annuity with a dependant's income attached would cover their essential bills for as long as either of them lives. Leaving the rest in drawdown would keep flexibility for holidays, the car and the things that are not essential. What it also does is fix part of his income permanently, at whatever rates happen to be available on the day, and that is not a decision he gets to revisit.
The honest drawbacks
Annuities are irreversible, and that single fact carries most of the weight. Once bought, the capital is gone and you cannot change your mind if your circumstances or your health change. A level annuity that looks generous at 65 will buy noticeably less at 85, because inflation does not stop when you retire. And unless you have built in a guarantee or a dependant's income, there may be nothing left for your family.
Rates also vary a great deal between providers, and health and lifestyle can improve the income on offer, so taking the first quote your existing provider sends you is rarely the best move. Many advisers now talk about flexing early and fixing later, using drawdown in the active years and securing a guaranteed income when certainty starts to matter more. That is a sequencing question as much as a product one, and the right answer depends on your health, your other income and who else depends on you.
In summary
Annuities have gone from being the option nobody wanted to a serious part of most retirement conversations, helped by better rates and by pensions coming into the inheritance tax net in 2027. What has not changed is the commitment involved. You are trading capital and flexibility for certainty, permanently, and the features that protect your family or your buying power all reduce the income you start with. The question is usually not whether to annuitise, but how much and when.
If you are approaching retirement and weighing up guaranteed income against keeping your pension invested, we would be glad to help you think it through. Get in touch with ACJ and we can look at your whole picture before anything is fixed in place.