The government’s “inheritance tax raid” on pensions has helped drive sales of retirement annuities to new highs.
Industry data this week revealed they enjoyed a “record-breaking” 2025, with sales growing by 4% to £7.4bn and the average amount invested in an annuity surpassing £80,000 for the first time.
Some of this enthusiasm for what many people traditionally viewed as a dull, poor value product, has been put down to people who are keen to ensure that no more of their cash than is necessary ends up in the hands of HM Revenue and Customs. In addition, many are seeking some certainty in turbulent times.
An annuity is a product that converts an individual’s pension pot into a regular, guaranteed income for the rest of their life (or for a fixed term). They pay a life insurance company a lump sum, and, in exchange, it guarantees a regular payout.
Demand plummeted after the “pension freedoms” introduced in 2015 meant people no longer had to take one out. But changes to inheritance tax (IHT) on pensions announced by Rachel Reeves in her October 2024 budget helped give them a new lease of life.
She said money left in a defined contribution (AKA money purchase) pension after someone’s death will be pulled into the IHT net from April 2027. All private pensions, and most workplace schemes, are defined contribution.
The changes mean “unused” pension savings could be taxed as part of someone’s estate if they exceed the IHT threshold. Unused funds are money in a pension pot that has not been used to claim an income – such as buying an annuity.
Commenting on the data issued by the Association of British Insurers, Clare Moffat at the insurer Royal London said: “With changes next year to inheritance tax and pensions, there has been an increased interest in using annuities for IHT planning.”
Annuities now also offer better value than they used to. Marianna Hunt at the investment firm Fidelity International said its recent data showed that a 66-year-old in good health with a £300,000 pension pot could buy a single-life annuity paying £22,440 a year – a rate of about 7.5%.
“Five years ago, rates were closer to 4%to 5%, delivering roughly £13,500 from the same pot. That’s a substantial uplift in guaranteed income,” she added.