Why annuity rates are favourable now — and why some clients are locking in

For most of the 2010s, annuities had a bad reputation. Low interest rates kept the income they could offer disappointingly small, the 2015 pension freedoms made drawdown the more fashionable option, and 'bad value' became the lazy shorthand for what an annuity bought you. That's no longer the picture in 2025/26.

Annuity rates have risen substantially since 2022, and current levels are some of the strongest seen in over a decade. For clients approaching or already in retirement, that's a meaningful shift — and one we think is worth understanding properly, even if you ultimately decide an annuity isn't for you.

What the numbers actually look like

Standard Life's Annuity Rates Tracker found that average rates for a healthy 65-year-old reached 7.72% in May 2025, the highest level of the decade — and described it as a 64% increase from the July 2020 low of 4.71%. By December 2025, the same tracker reported 7.51%, with year-on-year increases sustained through the year. The Association of British Insurers reported that the total value of premiums paid into individual annuities reached £7.4 billion in 2025, the highest annual level since the pension freedoms in 2014.

In practical terms, a healthy 65-year-old with a £100,000 pension pot can currently expect a single-life, level annuity of around £7,000 to £7,800 a year, depending on the provider and personal circumstances. Enhanced annuities — for those with qualifying health conditions — can pay materially more. These figures are illustrative; rates change frequently and your own quote will depend on age, health, postcode, and the options you choose.

Why rates have risen

Annuity rates are tied very closely to gilt yields — the return on UK government bonds — because that's largely what insurers buy with the money you hand over. When gilt yields rise, the income insurers can offer rises with them. Gilt yields, in turn, follow long-term interest rates and inflation expectations.

The interest rate environment from 2022 onwards has been the main driver. UK base rates rose from near zero to 5.25% by mid-2023, dragging gilt yields up sharply from the levels seen in the 2010s. Even as the Bank of England has begun cutting rates in 2024 and 2025, long-term gilt yields have remained elevated — partly because of stubborn inflation expectations, partly because of fiscal pressures, partly because of geopolitical uncertainty. The net effect on annuity rates has been to sustain them at levels that simply weren't available for most of the previous decade.

Why some clients are choosing to lock in now

There are three reasons we're seeing more clients seriously consider annuities, often as part of a broader plan rather than as the only solution:

• Rates may not stay at these levels. Annuity rates are not guaranteed. If long-term gilt yields fall — for example, if the Bank of England cuts rates further and inflation cools — annuity rates would likely fall with them. Several major providers and commentators have flagged this risk.
• Pensions and IHT change in April 2027. From 6 April 2027, unused defined contribution pension pots are due to come within Inheritance Tax. An annuity removes that issue: once you've bought one, the lump sum is gone from your estate, and the income you receive is paid for life with no residual pot to be taxed at death. For estates already exposed to IHT, that's a real consideration.
• Markets feel less comforting than they did. After a decade of equity gains, some clients are simply less willing to expose all of their retirement income to investment volatility. Annuities offer something drawdown cannot: an income that does not move when markets do.

The value of investments and the income from them can fall as well as rise; you may get back less than you invest. Past performance is not a reliable indicator of future results. Tax treatment depends on individual circumstances and may be subject to change in future.

Why some clients are still choosing to wait

Locking in is not the right answer for everyone. Annuity rates rise with age — a 70-year-old gets a better rate than a 65-year-old for the same pot — so for some clients the right call is to keep their pension invested in drawdown for now, and revisit the annuity question in their early or mid-70s. That's the 'flex then fix' approach we've written about in our annuity-vs-drawdown piece.

Buying an annuity is also irreversible in normal circumstances. Once it's set up, you can't change your mind, can't move providers, and (with most products) can't access the original capital. That permanence cuts both ways: it removes investment risk, but it also removes flexibility.

The 'flex then fix' middle ground

Many of our clients aren't choosing all-or-nothing. A common pattern is to keep the bulk of the pension in drawdown for the early retirement years, when flexibility is most valuable, and to use part of the pot to buy a level or inflation-linked annuity that covers essential expenses — food, utilities, council tax, basic running costs. That gives you a guaranteed income floor for life, with the rest of your pension free to keep working.

Another pattern is to stagger annuity purchases — buying an annuity in tranches, every few years, both to spread the rate risk and to take advantage of higher rates available at older ages. Both approaches sit on the spectrum between 'pure drawdown' and 'all annuity', and both can be appropriate depending on circumstances.

Practical steps if you're thinking about it

If you're seriously considering an annuity, three things are worth doing:

• Get personalised quotes from across the market. Rates differ meaningfully between providers, and the difference between the best and the average rate over a 25-year retirement can amount to tens of thousands of pounds.
• Disclose health and lifestyle accurately. Conditions you might not think relevant (high blood pressure, smoking, BMI, certain medications) can qualify you for an enhanced rate.
• Look at your old pensions for guaranteed annuity rates. Some pensions taken out in the 1980s and 1990s have GARs written into them, which can be considerably better than today's open-market rates.

How we think about this with clients

We'd never push a client into an annuity simply because rates are good — they're only one of several legitimate options, and the right answer depends on far more than the rate of the day. But we do think the current environment is worth understanding rather than ignoring. For some clients, locking in part of an income now makes the rest of their plan materially more resilient. For others, drawdown remains the better fit. The point is to make the choice deliberately.