Annuity sales jump as retirees ‘tempted’ by guaranteed incomes

As the Financial Conduct Authority (FCA) has announced that sales of retirement annuities, which give pensioners a guaranteed income, have jumped, Rachel Vahey, head of public policy at AJ Bell, thinks people should consider making decisions based on their long-term retirement strategy.

She said: “The number of people accessing their pension pots showed no signs of slowing down in the 2025/26 tax year. Pension savers swarmed to access over one million pension pots in a year that has been dominated by speculation over the future of pension tax-free cash. Savers will also have been spurred to action by the fast-approaching change in inheritance tax (IHT) rules in April next year.

“There was a surge in the amount of pension money accessed last tax year as it surpassed £91 billion, an astonishing 22 per cent increase compared with the previous year – and a truly staggering doubling on the total three years ago. The fact that more people now have defined contribution pension pots is a factor. However, the concern is that people aren’t making decisions based on what’s best for them, but because they are worried about rumours of changes to pension tax incentives from the government or planned changes in tax rules.

“Unless people make decisions based on their long-term retirement strategy, they could find themselves in later life having to rely on a much smaller retirement income than they wanted or anticipated.

“Many people are now starting to consider what the changes to bring unused pensions into the net of IHT means for them in practice. The data shows more people are choosing to move their pension pots into drawdown and start to take an income, especially over the second half of the tax year. It’s possible this is because they’re planning to spend or gift at least part of it as a way of mitigating their potential IHT liability.

“The number of pension pots used to buy an annuity also increased last year to over £100,000, perhaps due to better annuity rates but also because no IHT will apply to annuity income paid to a pension saver or their beneficiary. But this still only reflects a quarter of those choosing to move to drawdown.

“Those rushing to take this route should remember that it’s a big decision to buy an annuity and, importantly, one that cannot be reversed. It means giving up income flexibility and instead being locked into a pattern that you might be stuck with for 30 years as your life continues to change around you. And although there are tax charges on unused drawdown pots on death, it does mean that your loved ones might receive some money when you die, as opposed to an annuity that could just disappear on death completely.

“More than 400,000 pension pots were moved into drawdown last year, showing that many pension savers continue to crave the flexibility that this option gives them to take the right amount of money to suit their needs. It suggests that many find drawdown to be the perfect balance between access and investment.

“Fully cashing in pension savings continues to be the most popular way of accessing a pension plan, but in the last half of the 2025/26 tax year the number of people choosing drawdown was almost level with those choosing encashment.

“It is crucial that anyone entering drawdown has a clear plan for making their pension last, which means you need to regularly review your retirement strategy and withdrawals to make sure they remain sustainable. If you aren’t sure how to go about this, it’s worth considering employing a regulated financial adviser to help you navigate what can be complex choices.

“For those who don’t want to take any investment risk or engage with their pension in retirement, annuities might be a more suitable option – higher interest rates have contributed to a surge in annuities purchased in recent years. Once you lock into an annuity, there is no going back, making it critical that you shop around the market not just for the best rate, but for the product that is most appropriate to your circumstances before buying an annuity.

“It is also important to remember that you can mix-and-match annuities and drawdown to suit your needs. For example, you could choose to purchase an annuity to cover your fixed costs, retaining flexibility and the possibility of enjoying long-term growth with the rest of your pot. Equally, you could opt for drawdown in the early years of retirement, then convert your pot into an annuity later on, when you should get a better rate. The key is to focus on your long-term retirement goals and take an approach aligned to those goals.”