Annuity sales up by more than a third

More people opted for an annuity in the past year, seeking to benefit from the security of a guaranteed income and lock in higher rates.

Sales of retirement annuities jumped by over a third between 2022/23 and 2023/24, according to data from the Financial Conduct Authority (FCA).

Offering a guaranteed income for life, annuities are among the options to consider at and during retirement, alongside a pension drawdown plan, which involves taking income withdrawals directly from your pension pot while leaving the rest invested.

Increase in annuity sales

The total number of pension plans accessed for the first time increased by almost a fifth (19.7%) in the past year, to 885,455, compared to 739,652 in the previous 12-month period.

Sales of annuities saw the biggest increase, from 59,163 to 82,061 (38.7%), while drawdown sales were up 27.9% to 278,977.

It's thought that improved rates helped to boost the popularity of annuities.

Annuity rates are calculated based on gilt yields and interest rates as well as factors including your age, health and lifestyle, life expectancy, the size of your pension and the type of annuity you choose.

Rates on annuities are likely to fall back over the next few months as the Bank of England cuts interest rates, but they still offer good value for money.

If you decide to put some or all of your pension pot into an annuity, it's worth getting professional advice to help you find the right deal for your unique circumstances and requirements.

'Look across the market'

"After years on the sidelines of the retirement income market, annuities are enjoying their time in the sun, as increasing interest rates pushed incomes skyward," commented Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.

Data from Hargreaves Lansdown shows that a 65-year-old with £100,000 of pension savings can currently get up to £7,146 per year from a single life level annuity. This is up around 43% on what they would have got just three years ago.

Morrissey went on to warn that many people may not be opting for the best product for their needs, as the majority of annuities are taken on single life and level basis.

"This potentially means there are spouses that could be left with nothing when their partner dies," she explained.

"In addition, a sudden surge in inflation like we have seen in recent years could whittle away the purchasing power of that level annuity that looked such good value just a short time ago. It's vital that you consider what you need from your retirement income and look across the market before deciding to purchase an annuity rather than taking the first or highest income offered."

Five questions to ask

Consumer group Which? recently outlined five questions to ask yourself before buying an annuity:

1. How much income do you need in retirement?

• Your private pension savings and other savings and investments, together with the state pension, will determine how much you will have to live on in retirement. The Pension and Lifetime Savings Association (PLSA) has developed the retirement living standards to show what life in retirement looks like at three different levels, and how much annual income is needed for each.

2. Is an annuity the best way to cash in your pension?

• A guaranteed income for life might not be the best option for someone with serious health conditions, for example.

3. What type of annuity do you need?

• Think about which type of annuity would suit your circumstances best. A level annuity pays the same amount each year for the rest of your life, while an escalating annuity rises each year at a fixed rate to help you keep up with inflation. Meanwhile, a joint life annuity may provide a slightly lower income but will ensure your spouse continues to receive payments if you die first.

4. Can you get a better rate?

• Don't automatically accept the annuity rate offered by your pension provider without checking what's on offer across the rest of the market.

5. Have you been honest about your health?

• Some providers offer enhanced annuities to people in poor health or with lifestyle conditions that mean they might die earlier than the average life expectancy.

'Closest thing to free money'

For many years, the data showed that more than half of people were buying their annuity from their own pension provider. However, this is unlikely to provide the highest income.

Stephen Lowe, group communications director at retirement specialist Just Group, welcomed the fact that more people are shopping around but noted that four in ten are still buying their annuity in-house.

"It's a competitive market and it is very unlikely that your own provider will offer the top rate -- switching is the closest thing you will find to getting 'free money' in the financial world," he said.