Changes from the October Budget are bringing pensions into scope for inheritance tax (Image: Getty)
Sales of soared 20% in 2024 to £7 billion as savers’ fears grow over Rachel Reeves’ introduction of .
An annuity allows someone to cash in their pension, using the lump sum that has been invested to buy an insurance product which then pays out a monthly income.
An annuity means a pension is no longer invested and the only tax payable on income is income tax, if a pension income exceeds a saver’s personal tax-free allowance.
Pete Cowell, head of annuities at Standard Life, part of Phoenix Group, said Brits were increasingly choosing to access their now following changes to inheritance tax announced in October’s Budget.
He said: “We anticipate demand for annuities will remain strong, particularly with changes from the October Budget bringing pensions into scope for inheritance tax from 2027.
“The change is likely to encourage wealthier savers to access more of their pensions and annuities are proving an attractive way of doing so.”
An annuity is an insurance product which is bought with the money saved in a pension, it is used to buy an income. Annuities can be bought on joint life, or single life basis. They can also be bought to pay out an income for fixed period of years or for the rest of a life.
Money that remains in a pension is likely to be liable to inheritance tax from 2027 following the changes announced in the October budget.
By using their pension money to buy an income now, savers may avoid higher inheritance tax bills although the chancellor is still consulting on exactly how pensions will be taxed under the new regime.
According to the ABI, more people shopped around for their annuity than ever before with seven in ten (69%) buying their annuity from a different provider to the one they held their pension savings with.
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown (HL) said rising and soaring gilt yields had meant annuity rates had risen and people were getting more income for their money
She said the latest data from HL’s annuity search engine shows a 65-year-old with a £100,000 pension can get an income of up to £7,490 per year from a single life level annuity with a five-year guarantee so interest remains high.
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Morrissey added: “There’s also increased evidence that people are tailoring their annuity to fit their circumstances with sales of joint life, enhanced and escalating annuities all on the rise. There’s always a concern that people will go with the higher income offered by a single life annuity over a joint life, without realising that this could leave their partner with nothing when they die. The fact that joint life sales have increased is a real positive.”
Cowell added that annuity rates have improved over recent years (the current annuity rate for a healthy 65-year-old stands at 7.2% and the rate for a 70-year-old stands at 8.2% and there is renewed focus on using these products to deliver income certainty.
Stephen Lowe, group communications director at retirement specialist Just Group, said savers were getting more savvy by taking advice when buying an annuity.
He said: “The upward trend in people taking financial advice when buying an annuity – to 36% in 2024 compared to 29% the previous year – is very positive, as is the higher proportion of buyers securing enhanced annuity rates paying a higher income based on health history and lifestyle factors.
“The figures released by the ABI today show consumers are increasingly heeding the message to shop around and not take the deal offered by their existing pension provider. Seven in 10 (69%) switched from their own pension firm to a new provider when buying their annuity in 2004, up from 64% the previous year.”
He added: “Guaranteed income producing assets are very much in the consideration set alongside other assets. Sales of annuities are 66% higher than when pension freedoms were introduced in 2015. It’s great to see shopping around and switching become the norm because it means more money in people’s pockets every year for the rest of their lives.”