The taxable benefits of buying an annuity

What is an annuity?

An annuity is an insurance contract that offers the buyer a regular income for as long as they live, or for a fixed term.

Annuities have been steadily growing in popularity again. More than 88,000 people bought an annuity in the 2024/25 tax year, compared with around 82,000 people the previous year, according to Financial Conduct Authority (FCA) data.¹

There are several different types of annuities:

• Fixed annuities - these pay a guaranteed income.
• Variable annuities – these pay an income that will vary depending on the value of the underlying investments.
• Indexed annuities, which offer an income linked to a market index or inflation.
• Immediate needs annuities - these can be set up to provide a regular payment directly to a care home, typically free of tax.
• Deferred annuities, which begin paying an income at a future date.

One important point to note is that most annuities are irreversible. Once bought, you can’t change your mind. In effect, you are exchanging a pot of capital for a guaranteed income stream.

Annuities can also be built up through a series of purchases over time, rather than committing everything in one go. This approach may be more popular among those still earning a salary but who want to start securing a guaranteed income ahead of retirement.

Why are annuities back in fashion?

IHT planning

As pensions move into scope for IHT, many people are reconsidering whether to leave large sums untouched. Using pension savings to buy an annuity converts capital into income, which can reduce the size of an estate over time.

At the same time, more pensions are being accessed earlier. FCA data indicates that almost one million pots were accessed for the first time in the 2024/25 tax year, representing a 9% increase over the previous year.1 This rise highlights that with pensions falling into the IHT umbrella from April 2027, people may be more inclined to use money in their pensions to provide an income now, rather than leaving it for inheritees.

For some, annuities offer a structured way to draw on pension wealth and enjoy the benefits now, rather than allowing it to accumulate.

Market volatility

Annuity rates are closely linked to UK government (gilt) yields.

In recent years, higher inflation, energy market shocks and broader geopolitical uncertainty have pushed yields up, and annuities have followed. This has made them more attractive than they were a decade ago.

Another advantage of annuities is that they offer insulation from market swings. Most annuities provide a fixed income, regardless of how markets are performing. For anyone with a low appetite for risk, that stability may be appealing.

But those who buy a fixed income annuity risk seeing the real value of their income erode over time. While a fixed income may appear more attractive at first, over time high inflation could reduce its purchasing power.

It is also important to note that timing matters. The annuity rate locked in depends on the market conditions at the time of purchase. As rates fluctuate with gilt yields, future rates may be higher or lower.

A guaranteed income for life

At their core, annuities mean certainty. They can act as a form of insurance against living longer than expected.

With life expectancy rising, this is an important consideration to make. A lifetime annuity continues paying for as long as the policyholder lives, removing the risk of running out of money later in life.

A blended approach

While annuities provide security, they are not a one-size-fits-all solution.

The decision to buy one, which is typically irreversible, requires careful consideration to ensure you get the balance right. This lack of flexibility is one of the reasons why annuities are rarely used in isolation.

In most cases, the right approach to retirement will include a blend of guaranteed income, growth and tax efficiency.

A successful retirement plan balances security with flexibility – and professional advice is there to support in achieving that balance.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.

Source
¹ Financial Conduct Authority: Retirement Income market data – September 2025.