16 October 2025
general
If you’re worried about ensuring you’ll have a sustainable income to last throughout retirement, you’re not alone.
With annuity rates rising by 58% in four years, as reported by MoneyWeek, the opportunity to secure a guaranteed retirement income is increasingly appealing to retirees.
Indeed, annuity sales hit a 10-year high in 2024, rising by 24%.
According to Financial Planning Today, guaranteeing an income is the biggest retirement priority for 39% of people – and you could be one of them. With rates increasing, life expectancies rising, and recent Inheritance Tax (IHT) rule changes making holding onto a large pension pot less appealing, you may be considering annuities as a source of financial security in retirement.
However, annuities might not necessarily be suitable for everyone. While they can offer a range of benefits, there are also significant downsides to consider before committing to an annuity.
Read on to learn the types of annuities, the rates available to retirees in 2025, and the pros and cons of purchasing an annuity in retirement.
Annuities offer a guaranteed income
When purchasing an annuity, you effectively exchange some or all of your pension pot – or other savings and investments – for a regular income. The amount of income you receive will depend on:
In some cases, it might be suitable to use a portion of your pension to secure an annuity, while keeping the rest in drawdown.
There is a range of annuity types available
Annuities are not a one-size-fits-all retirement solution. There are various options to consider, which can make selecting an appropriate annuity for your needs complicated for many retirees.
Level, escalating, or inflation-linked annuity
You can either fix your income at an initially higher rate or take a lower income that rises over time.
According to AJ Bell, while £100,000 could purchase a level income of £7,600 a year in 2025, an inflation-linked annuity would offer a starting income of £5,000.
Single- or joint-life annuity
Typically, single-life annuities will stop paying out when you pass away. This can often result in them being viewed as risky, as a large portion of your pension savings could be lost if you die within just a few years of purchasing the annuity.
Alternatively, you could opt for a joint-life annuity. These generally continue paying an income to your spouse or partner after your death. However, the rates are often lower.
Lifetime, short- or fixed-term annuities
Often, people are attracted to the lifelong guarantee that lifetime annuities can offer. These will continue paying an income up until you pass away.
On the other hand, in some cases, a short- or fixed-term annuity might be suitable. These provide an income over a defined period, rather than for the rest of your life.
Income rates can vary depending on your age and lifestyle factors
Since August 2021, annuity rates have risen significantly – hitting an all-time high in June 2025, as MoneyWeek reports. While a 65-year-old could have used £100,000 of their pension to purchase a single-life level annuity of £4,943 in 2021, in June 2025 they could have secured an income of £7,947.
That said, annuity rates can fluctuate over time as they are closely linked to gilt yields, which are tied to interest rates. So, you can’t necessarily count on them to continue rising in the future.
Additionally, your rate may vary depending on the age at which you purchase the annuity. While 20% of annuities are purchased at age 65, you can do so at any time in your retirement. As of May 2025, a 60-year-old could have secured a rate of 7.01%, while the rate for a 70-year-old was 8.54%.
However, keep in mind this doesn’t necessarily mean you’re getting better value since, in the case of lifetime annuities, you’ll likely receive the income for a shorter period if you’re older.
Finally, you may be able to secure a more competitive rate by comparing annuities from different providers. While MoneyWeek reports that around a third of those opting for an annuity choose to stay with their current pension provider, comparing all of your options could increase your income by thousands of pounds over the course of your retirement.
You may find an annuity provides peace of mind
With many people living longer, retirement savings often need to stretch further. An annuity can give you peace of mind that you’ll receive a continuous income for some or all of your retirement, in addition to any other income, such as your State Pension or property income.
Additionally, with unused pension pots set to become subject to IHT from April 2027, using some of your funds to purchase an annuity could help reduce your estate’s tax liability after you die. However, the effectiveness of this strategy will depend on your individual circumstances, so it might be worth consulting with a financial planner before making any potentially irreversible decisions.
Flexibility can be limited, and annuities are irreversible
While annuities can offer valuable benefits, they are not risk-free. A large amount of your pension savings could potentially be lost if you died early in your retirement.
Annuities are also irreversible, so it’s crucial to ensure you select an appropriate one for your needs. A financial planner can help you weigh all your options to select one that suits your financial circumstances and retirement goals.
Finally, the consistent nature of the income means flexibility is limited. So, if you’re planning to spend more in early retirement, it may not be suitable to use all of your pension funds to purchase an annuity.
Get in touch
At J Edward Sellars, we can help compare all your retirement options to define a plan that helps provide the security and flexibility that your desired retirement lifestyle requires.
Email enquiries@jesellars.co.uk or call 01934 875 919 to find out more about how we can help you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.
