Overall premium values climbed by 4% during 2025 to hit a record £7.4 billion. Interestingly, the total number of policies issued actually fell by 2% to 87,600. This contrast highlights a distinct shift in consumer behaviour: while fewer individuals are purchasing these products overall, those who do are committing significantly larger pension pots to lock in their retirement income.
What is an annuity?
An annuity is a product you can purchase to provide you with a guaranteed income, usually in retirement. The annuity can cover you for a set period of time – such as from the time you retire until you are eligible for State Pension payments – or for life.
It is an alternative to accessing your pension pot through pension drawdown or withdrawing a lump sum, though it is important to remember that you do not need to choose one option. You could decide on a combination of all three by withdrawing some of your pension as a lump sum, purchasing an annuity and accessing the rest through a pension drawdown.
Why are annuity sales surging?
Demand for lifetime annuities among affluent retirees has skyrocketed in the last year. The ABI data show that there was a 31% jump in annuity purchases involving pots larger than £250,000, while those topping half a million pounds surged by a staggering 54%.
The main drivers behind the renaissance in annuity purchases include:
The impending Inheritance Tax changes
From 6th April 2027, defined contribution pensions are to become subject to inheritance tax, meaning that any 'unused' pension funds left upon death will face potential IHT charges if they push an estate over the IHT limit.
The IHT exemption of regular gifts from income
Some retirees have decided to use a substantial annuity purchase to generate excess cash. This surplus income can then be regularly gifted to heirs, a strategy that can qualify for an IHT exemption under current HMRC rules, provided meticulous records are kept and you are able to sustain your standard of living. Crucially there is no limit to the amount of income you can regular gift to avoid IHT. For more information read our article 'How to reduce your inheritance tax bill with gifts'.
Annuity rates becoming more attractive
Annuities pay out much more income than they did a decade ago. Currently a healthy 66-year-old with £300,000 in savings could currently secure an annual income of £23,205, equating to an annuity rate of roughly 7.735%. Five years ago, the same pot would have yielded a much lower £13,500 due to rates hovering closer to 4.5%. You can find out more details on the current best annuity rates in our article on the 'Best annuity rates for £100,000'.
Furthermore, if you have a health condition then you may be able to increase your retirement income by purchasing an enhanced annuity. An enhanced annuity is for people who meet certain criteria that could reduce their life expectancy, such as smokers, people prescribed medication, or people who have worked in hazardous conditions throughout their working life. You will usually have to fill out an enhanced annuity questionnaire to assess whether it’s suitable for you. However, you may be able to get an annuity income that is 20%-50% higher, in recognition of the fact that you won’t be expected to live a long life. This free annuity calculator, provided by the Money Helper, provides standard annuity and enhanced annuity quotes based on your personal circumstances and health.
The appeal of income certainty
Investment market volatility has encouraged some retirees to seek greater financial security. Locking in a guaranteed income alleviates concerns about fluctuating markets while their pension is in drawdown, and the worry of outliving pension savings. Rob Yuille from the ABI suggests there is a growing preference for a "flex then fix" approach when it comes to retirement. This involves utilising flexible drawdown options early in retirement before purchasing an annuity later in life, at higher annuity rates, when certainty becomes more important.
The ability to protect future income from inflation
The growing cost of living has led to an increase in the popularity of escalating annuities; products where payouts rise annually to counter inflation. The sale of escalating annuities grew by 10% in 2025, reaching over 18,000 sales. This marks the highest volume for inflation-linked options recorded since 2013, showing a clear desire to protect purchasing power over time. The trade-off when opting for an escalating annuity is that the initial level of income is usually lower than that provided by an annuity where the income is fixed for its duration.
Why a phased mix of annuities and drawdown may be the optimal choice
In this video, I explain the difference between choosing an annuity and flexible drawdown when it comes to retirement income, and why the optimum level of income is likely to come from a phased mix of the two options.
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