Have annuity rates reached their peak?

Annuity incomes have soared in recent years, but interest rate cuts could soon start to reverse this trend.

Retirees buying an annuity can now get thousands of pounds extra a year compared to those who bought one just a few years ago. This has led to annuity sales reaching a 10-year high. 

Here, we explain why annuity rates could be about to fall – and how to secure the best deal. 

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What's happening with annuity rates?

Annuity rates are closely tied to gilt yields and the Bank of England base rate. 

Annuity providers typically use government bonds (gilts) to fund the income they promise. These are low-risk investments that pay a fixed rate of interest, which tends to rise and fall with the base rate.

When the base rate goes up, gilt yields rise too – and that pushes annuity rates higher. That’s exactly what we’ve seen over the past couple of years, with rates hitting a 16-year high.

A 65-year-old with a £100,000 pension pot can now get up to £7,940 a year from a single-life annuity. This is up nearly 60% compared to four years ago, when they’d have got less than £5,000.

But the Bank of England is expected to cut rates this week, with further cuts expected later in the year. This could put the brakes on annuity rates.

• Find out more: best annuity rates May 2025

Is it still worth buying an annuity?

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

The secure income provided by annuities is their big selling point – and the high rates currently on offer have helped boost their popularity. 

While looming interest rate cuts mean annuity incomes may have reached their peak, the good news is that they're likely to fall much more steadily than they increased.

• Find out more: your options for accessing your pension

What should you consider before buying an annuity?

Unlike with pension drawdown, where you’ll need to keep monitoring your investments and making careful decisions about how much to withdraw, there’s no need to review anything once you’ve bought an annuity. 

You don’t have to use your entire pension pot to buy an annuity; neither do you have to buy one as soon as you retire. 

For example, you might decide to start taking an income through drawdown and then buy an annuity with your remaining pot later on. This means you can benefit from extra growth by leaving your pension invested for longer.

And you'll generally find that the older you are when you arrange an annuity, the higher the annuity rate you'll get, reflecting the fact that the annuity provider won't have to pay out for as long.

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How to find the best annuity rate

Once you’ve converted your savings into an annuity, you can’t reverse the process, even if your circumstances change, so it’s important to make sure the decision is right for you and to get the best deal possible.

Shop around

The income you’ll get from an annuity depends on the amount you’re converting and the rate offered by the provider you choose. 

It's common for retirees to stick with their existing pension provider when buying an annuity. However, it’s a competitive market so accepting the first quote you’re offered could mean you miss out on thousands of pounds over your retirement. 

Declare any health conditions

The more information you share with your provider about your health - from whether you smoke to details of any medical conditions - the higher the income you could receive. 

This could be as much as 30% more than a standard annuity. That’s because the provider won’t expect to have to pay out for as long if your life expectancy is shorter than average. 

These annuities are known as ‘enhanced annuities.’ 

Consider inflation

With a ‘level’ annuity, the income you get will be fixed from the outset, so it won’t keep up with rising prices. 

You can solve this by opting for an inflation-linked annuity, where your payments rise over time. 

But the trade-off is that you’ll start off with a much lower income compared to a level annuity – and it could take you many years to match it. 

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