When planning your retirement, one of the key decisions you need to make is how you will use your savings to generate a regular income once you stop working.
Since the introduction of Pension Freedoms in 2015, many people have chosen flexible drawdown.
In effect, this means drawing regular amounts from your pension throughout retirement. You can take as much or as little as you need and leave the rest of the funds invested. However, if you spend your entire pot, you can no longer draw an income.
While drawdown has become more popular, annuities have seen a resurgence in recent years.
An annuity is a type of insurance product that allows you to exchange some or all of your retirement savings for a guaranteed income over a set period or for the rest of your life.
Read on to learn why annuity sales have recently hit record levels and whether this retirement income option could be suitable for you.
Annuity sales reached £7.4 billion in 2025
According to Professional Pensions, annuity sales increased by 4% in 2025, reaching £7.4 billion. This is the highest annual level since Pension Freedoms were introduced.
There are several reasons for this increase.
First, the guaranteed income from an annuity may be more attractive as the cost of living rises and savers are more concerned about running out of money in retirement.
Additionally, recent periods of stubborn inflation and relatively high interest rates have caused bond yields to rise. Annuity rates – which dictate the level of income you receive – typically rise in line with bond yields.
That’s why Pensions Age reports that by the end of 2025, the average annuity rate for a healthy 65-year-old had reached 7.51%.
This means that somebody retiring with a pension pot of £100,000 would have received £7,510 a year from an annuity. At the end of 2024, when rates were lower, the same person would only have received £7,120.
The figures suggest that over the course of a retirement, this difference in annuity rates could equate to an extra £7,000 to £9,000 in total income.
Naturally, this makes annuities more attractive than they were previously.
Finally, after announcements about the upcoming changes to rules around Inheritance Tax (IHT) and pensions, many retirees are choosing annuities as a way to protect their savings from tax.
However, despite these potential advantages of annuities, it’s important to consider all the pros and cons before deciding how to draw an income in retirement.
The guaranteed income from an annuity offers peace of mind
When you purchase an annuity, you pay a portion of your pension and, in exchange, receive a set income.
There are several different types of annuities you can choose from, including:
- Lifetime annuity – Pays an income for the rest of your life.
- Fixed-term annuity – Pays an income for a set period, such as 10 or 20 years.
- Inflation-linked annuity – The income you receive increases in line with inflation, to help you manage the rising cost of living.
- Joint-life annuity – Pays an income to you and makes continued payments to a surviving spouse or civil partner when you pass away.
The key benefit of an annuity is that you receive a regular income for the rest of your life, if you choose. Depending on the type of annuity, your income might rise with inflation, too.
This means that it’s far easier to plan your retirement income, and you can be safe in the knowledge that you won’t run out of money.
Additionally, you are less vulnerable to market movements. Once you purchase the annuity and lock in the rate, you’ll receive that level of income for the defined period.
Conversely, if you leave your pension invested and draw from it flexibly, the value of the pot could fall if markets dip. To maintain the same level of income, you’d need to deplete your pension pot faster. Alternatively, you may have to reduce the income you draw and potentially sacrifice your lifestyle.
An annuity could protect you from this situation. That said, you won’t benefit when stock markets rise either.
For those who value the peace of mind that comes with a consistent income, annuities could be a suitable option.
You lack some flexibility if you choose an annuity
Although an annuity offers certainty about the level of income you will receive, you do sacrifice some flexibility.
If you choose flexible drawdown, you can draw from your pension as and when you like.
At the beginning of your retirement, when you’re more active and may be travelling more, you can draw a larger amount from your pensions to fund your lifestyle. Later in life, when you’re less able to travel and your expenses are lower, you might take a lower amount.
You can also take larger one-off lump sums if needed.
In comparison, when you purchase an annuity, the level of income is typically fixed for a set period, unless you choose an inflation-linked annuity.
As such, if your lifestyle suddenly changes and you need to draw a higher level of income, you may not be able to with an annuity. Additionally, you may not be able to take out a lump sum to meet goals such as renovating your home, taking a once-in-a-lifetime trip, or helping a family member.
It could also be more difficult to manage your Income Tax liability with an annuity. When you choose flexible drawdown, you can change the amount you take from your pensions and balance this with funds from other sources to limit your taxable income each year.
The fixed level of income with an annuity could make it more difficult to do this.
We can help you develop a retirement income strategy that works for you
Deciding between annuities and drawdown is challenging. You must consider what is more important to you: a reliable income or increased flexibility.
You’ll also need to review the current annuity rates, the size of your pension pot, and your planned spending in retirement to decide how best to generate the income you need.
Fortunately, it’s not a binary decision. Many retirees use a combination of annuities and drawdown. For example, you might draw flexibly from your pension in the early years of retirement as you travel the world and enjoy an active social life.
Then, when you slow down and the guarantee of an income that will last the rest of your life becomes more important, you could purchase an annuity.
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We can discuss your personal situation and goals with you to help you find a retirement income solution that works for you.
Please get in touch to find out how our team of VouchedFor Top Rated planners could help today.
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.
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.
The Financial Conduct Authority does not regulate estate planning or tax planning.
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.