Annuity sales hit 10-year high – your retirement income options explained

Sales of annuities hit a 10-year high in 2024, according to data from the Association of British Insurers (ABI).

Nearly 90,000 annuities were taken out last year, with attractive interest rates tempting savers to opt for a guaranteed income in later life. 

Here, Which? explains how annuities work and outlines the alternative ways to cash in your retirement savings.

Annuity transactions on the rise

ABI statistics show annuity transactions reached a 10-year high in 2024 – recording the highest total since pension freedoms were introduced in 2015. 

Sales of pension annuity contracts rose by 24% to 89,600, while the total value of annuity purchases increased by 34% to reach £7bn.

Opting for an annuity involves swapping some or all of your pension savings for a guaranteed income for the rest of your life.

The exact amount you'll receive in return for your pension savings depends on the rate a company offers you. 

When pricing annuities, providers consider the broader economic picture and your personal circumstances (for example, your age, location and health).

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Why are annuities becoming more popular?

The gradual increase in sales of annuities over the past decade has been driven to some degree by rising interest rates and high gilt (UK government bond) yields. 

Gilts had already been trading on higher yields, thanks to the current Bank of England base rate, which is relatively high at 4.5%.

However, when the Bank of England sold another £750m of bonds in mid-January, it reduced the price of bonds and further drove up the yield. This means annuity companies can offer better rates. 

For example, a healthy 65-year-old with a £100,000 pension pot can currently get an income of around £7,500 per year, compared to £6,600 two years ago. 

• Find out more: best annuity rates

More people are shopping around

The ABI's research also showed that almost seven in 10 (69%) of annuity buyers took an annuity from a different provider to the one they held their pension savings with. This is up from 64% in 2023.

Different providers offer different rates, and not searching the market can leave you thousands of pounds worse off over the course of your retirement.

Shopping around is extremely important, as once you've bought an annuity you can't reverse the process, so it's best to take the time to choose the right provider and product option for you.  

More annuity purchases occurred after taking financial advice in 2024. The ABI says 36% of buyers took advice, compared to 29% in 2023.

• Find out more: what are annuities?

Exploring different types of annuity

The proportion of joint-life annuities (which provide for a dependant), enhanced annuities (based on health and lifestyle underwriting) and escalating annuities (which increase payments each year to counter the impact of inflation) all increased in 2024.

Savers may opt for the higher income offered by a single-life annuity over a joint-life product, without realising that this could leave their partner with nothing when they die. 

The difference in income can be relatively small. Based on the £100,000 pension pot scenario we mentioned earlier, the starting amount for a joint-life annuity, which pays 50% to the surviving partner, would be around £7,130 per year. 

An increase in inflation-linked products reflects the fact that the recent spell of high inflation is encouraging retirees to opt for an escalating annuity, despite the lower starting income – around £5,100 per year using our scenario.

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Alternatives to an annuity

Choosing an annuity is probably the most straightforward way to cash in your retirement savings. There is no investment risk involved with an annuity and no ongoing charges to pay. 

However, the fact that your money is no longer invested also means it will no longer have the opportunity to grow.

An annuity is only one of the ways to convert your pension savings into retirement income. 

Pension drawdown

With pension drawdown, you keep your savings invested and draw out income when you wish. This flexibility to take money out as and when you want has made it the most popular retirement income option.

But there are risks to consider. It's up to you to manage your investments and withdrawals carefully, to ensure your pot lasts for the rest of your life. The value of your pot could take a hit if your investments underperform, or if you withdraw too much too soon. 

• Find out more: what is pension drawdown?

Cashing in your pension

You can also cash in pensions entirely, but you’ll potentially have to pay income tax on a significant part of the pot.

Whichever way you choose to access your pension, you can take the first 25% as a tax-free lump sum. The rest will be added to your income for the year and taxed accordingly.

A guaranteed income

With far fewer people having generous defined benefit or final salary pensions these days, many retirees are in need of a level of guaranteed income before they qualify for the state pension. 

Considering an annuity doesn’t have to be a binary decision. You don’t have to annuitise your whole pension at the outset. For example, it may be that you use part of your pot for an annuity, while keeping the rest in income drawdown where it can grow. 

The ABI says the most common age to purchase an annuity is 65, making up 20% of all sales. 

However, arranging an annuity at a later age can produce a larger income and the increased probability that you will qualify for an enhanced annuity with higher annual payments.