Annuities are back. But are they the way forward?

Surging annuities prove the growing interest in guaranteed retirement income. But while securing a regular income is an undisputable strength of these instruments, the downside of potentially missing out on portfolio growth is a challenging conversation advisers are having with their clients.

Figures revealed by the Association of British Insurers (ABI) have underlined the continuing demand for income certainty among the newly retired. Sales of annuities leapt 24% in 2024, with 89,600 contracts issued. This figure exceeds the total number of annuities arranged in 2023, representing the largest take-up in a decade. The sales were valued at £7bn, 34% higher than the previous year.

Nearly seven in 10 (69%) annuity buyers switched provider, i.e., they took an annuity from a different provider to the one they built their pension savings with. This is five percentage points higher than in 2023.

Age 65 continues to be the most common age to buy an annuity, amounting to 20% of all sales. The data from the ABI also indicates that more annuity purchases came about after individuals took financial advice in 2024 – 36% of buyers received advice compared to 29% in 2023.

There were also increased sales of joint life annuities providing for a dependant, enhanced annuities factoring in health and lifestyle factors, and escalating annuities designed to stay in step with inflation.

What lies behind the revival of annuities?

When pension freedoms arrived in 2015, the talk was all about drawdown from pensions replacing annuities as the way forward in later life financial security. Six intervening years of ultra-low interest rates and consequently low annuity payouts reinforced the widespread belief that annuities were past their use-by date. Stock market returns were favoured as the smart way to boost pension investments and thus provide sufficient retirement income.

The situation changed course when UK interest rates started their steep climb in 2021, and annuity rates followed upwards in their wake. With annuities achieving a steady comeback over the past three years, it has become increasingly nuanced for those entering retirement whether to go for drawdown based on expectations of long-term stock market performance or choose an annuity to obtain known income for the rest of their life – or opt for a combination of both routes, if available.

Volatility in markets is a factor known to influence the decision-making of those entering retirement. A guaranteed income for life can be an attractive proposition when topsy-turvy share prices grab the headlines, and are reflected in fluctuating daily values of pension savings readily available online and in phone apps. On the other side of the coin, once an annuity is bought, the retiree has to grasp that the capital is gone forever in exchange for a set annual income, having to surrender any potential investment growth.

Guaranteed retirement income is here to stay

The growth of annuities amid uncertain market conditions and global instability points to a continuing strong appetite for knowable retirement income. However, financial advisers and planners, as well as investment managers to whom they may outsource their clients’ investments, are well positioned to spot and take advantage of market opportunities in pursuit of long-term portfolio growth. It therefore makes sense to consider the suitability of a blended approach, where a pension pot is split into an annuity and a drawdown arrangement at the point of retirement.

A provider able to offer this flexibility is well placed to hit the mark for advised clients who desire the best of both income avenues for peace of mind. Their day-to-day living expenses in retirement can potentially be covered by an annuity, while their drawdown pot can be accessed for discretionary spending in keeping with the state of play in the markets.

Talk to us

At 7IM, we understand annuities could form an important part of a client’s financial plan and we’ve been providing advisers with the flexibility to deliver the best plans for their clients. Our comprehensive range of services includes Secure Lifetime Income (SLI), which allows advisers to simply and effectively incorporate a guaranteed income for life as part of a drawdown plan.

In an increasingly challenging economic environment, retirees need flexibility and control, and SLI provides the ability and flexibility they need to control their pension wealth. If you’d like to discuss this in further detail, get in touch with us.