An increasing number of retirees are choosing to purchase annuities with their pension funds. In fact, MoneyWeek reports that annuity sales reached £7.4 billion in 2025 (4% more than the year before).

Reasons for this surge include better rates, an increased focus on stability amid rising geopolitical tensions, and upcoming changes to Inheritance Tax (IHT).

Read more: How Inheritance Tax rules are changing for pensions

Keep reading to learn more about how an annuity functions, the potential benefits and pitfalls, as well as how financial advice can help you decide whether it suits your financial plan.

Annuities offer a guaranteed income for life or a fixed period of time

At retirement, you can use your invested pension pot to purchase an income, known as an annuity.

This income can:

• Support you for a set period – known as a fixed-term annuity
• Pay out regularly for the rest of your life – known as a lifetime annuity.

Using a lifetime annuity as an example, the MoneyHelper calculator tool confirms that if your pension pot was worth £500,000 and you wanted to retire at age 65, you could purchase an annuity and receive an estimated annual income of £28,000 for the rest of your life.

It is no surprise that many retirees prefer annuities due to the reliability they offer, especially during periods of volatility.

An annuity uses your invested fund to purchase a regular and stable income. This can be reassuring and provide peace of mind compared to other options, like drawdown, which keeps your unused funds invested and at the mercy of the markets.

Improved rates have made annuities more appealing

Annuity rates have also become increasingly generous in the last few years.

The Guardian reports that, in February 2026, a 66-year-old in good health with a £300,000 pension pot could buy a single-life annuity at a rate of about 7.5%. This would provide an annual income of £22,440. Five years ago, this same pot would have delivered an income of roughly £13,500.

This upturn is attributed to improved government bond (gilt) yields, which, in March 2026, have hit their highest level since 2008, MoneyWeek reports. Better rates mean that individuals can secure a higher, guaranteed income.

Annuities might help reduce your estate’s Inheritance Tax liability

Annuities are also being used to mitigate upcoming changes to IHT and unused pension pots.

As announced by chancellor Rachel Reeves in her 2024 Autumn Budget, most unused pension funds and pension death benefits will be brought into scope for IHT from 6 April 2027.

While unused pension funds might be liable for an IHT charge upon death, if you use your funds to purchase an annuity, this amount could fall outside of the remit of your estate. However, anyone who receives payments from your annuity after your death may still need to pay IHT.

Whether an annuity works for you depends on a variety of factors, so you shouldn’t rush any decisions. Professional advice can help you determine whether purchasing an annuity is the right course of action for your plan or if you should pursue other IHT-efficiency routes.

3 potential pitfalls you should be aware of before purchasing an annuity

1. Inflexibility

Annuities offer you a regular income in retirement paid on an agreed basis. This means that you cannot pick and choose how much of your pension wealth to withdraw at any given time.

Annuities are also typically irreversible (after an initial cooling-off period), meaning that once you purchase an annuity, you can’t exchange it back for your invested fund.

2. No chance of growth

You can either use some or all of your pension fund to purchase an annuity at retirement.

Doing so cashes out that portion of your investment, as the money in your pot is converted into an income.

With no pot (or a reduced pot), your wealth will no longer be able to benefit from investment growth, or will do so with a much smaller fund.

3. Inflation risk

When you purchase an annuity, you lock into the prevailing rates at that time.

These rates are fixed and do not typically adjust to inflation, which could reduce the real-terms value of your regular income over time.

While you can buy index-linked annuities – which ensure your payments rise each year in line with inflation – these are typically more expensive and mean your initial payments will be lower.

Get in touch

An annuity can provide guaranteed, secure, and consistent retirement wealth.

However, you might prefer a more flexible option, like pension drawdown, or use a combination of methods to provide both stability and flexibility.

To find out what pension income option works best for you, get in touch with The Pension Planner today. We can help create a bespoke pension withdrawal plan tailored to your financial objectives and lifestyle preferences.

Email info@thepensionplanner.co.uk or call 0800 0787 182.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

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.