Annuity appeal: Balancing flexibility with stability in a world of pension freedoms
Annuity appeal: Balancing flexibility with stability in a world of pension freedoms
Just over a decade ago, on 6 April 2015, the start of the new tax year also ushered in the beginning of a new era in pension planning.
With the introduction of Pension Freedoms, individuals aged 55 and over were liberated from the previously rigid regime governing how they could access their defined contribution pension pots. The days of mandatory annuitisation were over.
In their place, people were presented with a range of choices over how to fund their retirement. Further to purchasing annuities, they could keep money invested and make flexible withdrawals, they could take 25% of their pot in tax-free cash, or they could unlock full access to their retirement savings. They were also free to mix and match these approaches based on their personal financial situation and needs.
But as well as affording savers greater agency and opportunity, this revolution also handed individuals more responsibility and exposed them to more risk. Ever since, the goal of achieving financial security in later life has become dependent on making good, well-informed decisions based on all the many options available in the market.
Ten years on from the introduction of Pension Freedoms, it appears not all UK savers are knowledgeable about these changes and the implications they have had on retirement planning. Indeed, one survey suggests that only around a quarter (27%) understood the reforms, while fewer than half (47%) were aware of the pension choices available to them at retirement.
Seeking financial stability
Even among those with a strong grasp of the pensions landscape and an appreciation for the flexibility they are now afforded there is some hesitancy. Some are confused about how to evaluate the breadth of options, how to decide on the best course of action, and how to ensure they retain sufficient funds to support their desired lifestyle throughout their later years.
This is underlined by research suggesting that nearly a third of over 55s (32%) are not confident in their understanding of pension withdrawal options.
Adding into this mix the broader context of an uncertain economic climate and an unstable geopolitical environment and it is easy to see why many facing retirement are seeking a stable refuge for their savings, where flexibility can be balanced by stability and certainty.
The return of the annuity
Annuities are increasingly being seen as an answer to this predicament. Data from the Association of British Insurers shows that total sales of pension annuities hit a ten-year high in 2024, jumping 24% year-on-year. This help pushed the total value of annuity sales 34% higher to £7 billion, continuing a rising trend that began in 2022.
Separate research reveals that the average annuity purchase size was £162,729 for the first half of 2025, compared with an average of £62,301 in 2021. This represents an increase of 160%.
In simple terms, a pension annuity involves entering into a contract with an insurance provider to exchange all or part of your pension pot in return for a guaranteed income. The term comes from the Latin ‘annuus’, meaning yearly, referring to the long-established concept of receiving a regular payment or allowance in exchange for upfront capital.
Different types of annuities are available, including:
Lifetime annuity
The most common type of annuity, this guarantees a level of income until death, with the additional possibility of securing a “guarantee period” to maintain payments for a set time even if you pass away shortly after taking out the policy. Payments cover an individual in the case of single-life policies, while joint-life policies facilitate ongoing payments to a spouse or partner after death, typically at a reduced level.
Fixed-term annuity
Income is guaranteed for a specific period of time. Depending on the detail of the policy in question, at the end of this period an individual might receive a guaranteed maturity sum, with the potential to reinvest this money in another product.
Enhanced/Impaired Life Annuity
Policies are underwritten according to an individual’s specific health or lifestyle factors, with shorter life expectancy potentially reflected in higher income.
Policies will either be based on payment of a level, unchanging amount or income can escalate, based on either a fixed rate or in line with inflation. There is also potential for annuity income to be linked to the performance of underlying investments, introducing higher levels of risk.
An important factor helping drive the recent rise in annuities is interest rates. Having languished at record lows for many years, the comparatively higher rates of today have fed into annuity rates, increasing income returns.
Annuities have also risen in prominence on the back of proposed tax policy changes relating to pension wealth. While existing rules mean pensions can be passed on tax-free, the current government announced at Autumn Budget 2024 that most unused pension funds and death benefits will count towards the value of an individual’s estate from 6 April 2027, potentially placing them within the scope of Inheritance Tax.
A personal choice
Changes such as these might enhance the appeal of annuities for some, but it is clear that every individual will need to consider their own circumstances very carefully to be confident this path is right for them – particularly in light of the fact that annuities are effectively irreversible (following the expiry of any initial cancellation window).
This only serves to underline the importance of receiving professional, regulated financial advice when making such a commitment, ensuring that all options have been considered and that the chosen product represents optimal value in the context of all those available.
A decade after Pension Freedoms were introduced, this level of choice points to the flexibility inherent in today’s market. Equally, however, the renewed appetite for annuities shows how financial certainty and peace of mind remain valuable commodities for those contemplating their legacy plans and deciding how to fund their retirement years.
The information supplied is based upon our understanding of current UK law and HM Revenue and Customs (HMRC) practice. Tax law and HMRC practice may change from time to time. The value of any tax relief will depend on the individual circumstances of the investor. The Financial Conduct Authority does not regulate tax advice.
The FCA does not regulate Occupational Pension Schemes these are regulated by the Pensions Regulator.
The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.