Annuities set for comeback as rates soar: Six retirement planning considerations

With weakness in equity markets and turmoil in bond markets, it is a difficult time for those trying to plan their retirement finances. Silver linings to the financial clouds can be tricky to identify but one is visible in the form of massively higher annuity rates.

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Published: 05 Oct 2022 Updated: 05 Oct 2022

Gilt yields have soared this year, with the key 15-year gilt surging towards 5% this week before the Bank of England’s bond market intervention. This has turbo-boosted the annual incomes that retirees can get from lifetime and fixed-term annuities.

‘Annuities have become a much more attractive option, particularly for those who value the security of the guaranteed income they offer,’ says Gary Smith, Financial Planning Director at Evelyn Partners.

With a £100,000 lump sum a 65-year-old retiree can now buy a level single-life annuity that will provide an income of about £6,600 a year. At the start of this year, they would have been lucky to get £4,800, which means annuity incomes have risen by nearly 40% from their January floor.

Looked at another way, if the 65-year-old lives to age 85 years, the annuity purchaser will get a total of £132,000 in income for their £100,000 outlay rather than the £94,000 they would have got in January this year. Alternatively, the 65-year-old would have to live for just over fifteen years to recoup their annuity outlay.

‘Given this revitalisation, annuities are set to make a comeback as a valued part of the retirement planning toolkit,’ says Smith.

Annuities fell out of favour after pension freedoms were introduced in 2015, which meant that savers could access their pots flexibly, withdraw a tax-free lump sum and take an income by keeping their pension savings invested. With interest rates and gilt yields at rock bottom, so were annuity rates, which made the incomes on offer from insurers look poor value for the large lump sums being charged.

With the equities bull market making drawdown the more attractive strategy, annuities almost overnight became the poor cousin of pension pot options, with sales plummeting. In the 2020/21 tax year only 10% of pension funds were used to buy an annuity.

Unappealing annuity rates persisted until the start of this year when the Bank of England’s rate-hiking agenda started to boost bond yields.

‘At the same time, pension savers have begun to see the rockier side of drawdown as market volatility has hit fund values and made taking an income from investments without running down their pot a tricky business,’ says Smith.

‘On the flipside, some of those looking at retirement now might not want to crystallise losses by selling a lot of investments to raise the cash for an annuity, leaving them between a rock and a hard place. All of which goes to show the wisdom of gradually building up a cash or cash-equivalent reserve in one’s pension portfolio well before retirement becomes a live issue.’

Annuity purchasers must decide what sort of annuity they want – for instance whether they want inflation protection or a joint life annuity that pays out to  a spouse or partner after death. But such enhancements usually involve accepting lower rates. Apart from this product choice there are a number of considerations to think about when using annuities as part of retirement.

Smith says: ‘A basic point to remember is that pension annuity income is of course taxable and must be added to any other income for the purposes of tax liability. So if being used in combination with drawdown and / or with the state pension, be aware how purchasing an annuity will influence plans to access your pension pot tax-efficiently.’


  1. You don’t have to use all of your pot to buy an annuity. They can be used in combination with drawdown. Retirees who would prefer to have a slightly higher guaranteed income than they get from the state pension, can make up the difference by buying a relatively small annuity. This could for instance be set at a level so that all essential life expenses are covered. The rest of the pension pot could then be put into drawdown.

  1. There could be a ‘good age’ to buy one. Another strategy is to ‘flex first and fix later’. The disadvantage of purchasing an annuity early in the retirement phase is that a chunk is taken out of the pot that could be earning future investment returns. Moreover, as a retiree gets older they may be less inclined to manage the complexities and risks of drawdown and will give more value to the security of a guaranteed income. With this in mind, the plan would be to take an income from drawdown until a certain age (which will vary widely according to individual circumstances), at which point the pot is liquidated for an annuity.

  1. The ‘surrogate state pension’. Yet another option for those who have built up larger pots with a view to retiring early is to buy an annuity to furnish a guaranteed income until the state pension arrives. Someone at age 57 could use part of their pot to buy a 10-year fixed term annuity to provide a guaranteed income to take them up to state pension age, while drawing additional funds if needed from the remaining invested pot. As savers can purchase more than one annuity over their retirement this does not stop them from also buying one in the later phase.The ability to buy a fixed-term annuity for a short spell and then a lifetime product later on is also useful for those who think annuity rates have further to improve.

  1. An annuity does not trigger the money purchase annual allowance. Just like the 25% tax free lump sum, purchasing an annuity does not trigger the money purchase annual allowance. This means that  you can continue to contribute the annual allowance of £40,000 to a pension and benefit from tax relief.

  1. ‘Tax efficient’ annuities. You can buy a purchased life annuity from funds outside your pension pot – but that could be cash raised from the tax-free lump sum withdrawal. Savers can invest a cash lump sum in return for a regular guaranteed income, some of which – as it is the ‘return of your lump sum’ - is not taxed. This can also be useful for those who have utilised their pensions Lifetime Allowance and want to supplement their guaranteed income.

  1. Family considerations. It is possible to include options that can protect your family on your death, although adding these options will reduce the level of starting annuity you can receive. These can include a spouse/partner payout that could be 100% or 50% of the pension you receive. Any ongoing annuity received by a spouse/partner would be free of income tax if death occurs before age 75, but taxable if death occurs post age 75. Where the annuitant wants to provide some protection for their children / grandchildren, they could include a guaranteed period, and this will ensure that the annuity is paid for a set period of time, regardless of whether or not they survive this period. If death occurs pre-75 this is typically paid free of tax, with tax paid on death post age 75.