UK Annuity Sales Reach Record Highs Amid Inheritance Tax Reforms
Sales of retirement annuities in the United Kingdom have soared to unprecedented levels, with industry data revealing a record-breaking performance in 2025. According to recent reports, annuity sales increased by 4% to reach £7.4 billion, while the average amount invested in an annuity surpassed £80,000 for the first time in history.
Inheritance Tax Changes Fuel Demand for Annuities
A significant driver behind this surge in annuity sales is the government's inheritance tax adjustments announced by Chancellor Rachel Reeves in her October 2024 budget. These changes, set to take effect from April 2027, will include money left in defined contribution pensions within the inheritance tax net. This means that unused pension savings could be taxed as part of an estate if they exceed the inheritance tax threshold, encouraging more individuals to invest in annuities to avoid potential tax liabilities.
Clare Moffat, a representative from the insurer Royal London, commented on the data released by the Association of British Insurers, stating, "With changes next year to inheritance tax and pensions, there has been an increased interest in using annuities for inheritance tax planning." This shift reflects a growing desire among people to protect their assets from HM Revenue and Customs while seeking financial certainty in turbulent economic times.
What Are Annuities and Why Are They Gaining Popularity?
An annuity is a financial product that converts an individual's pension pot into a regular, guaranteed income for the rest of their life or a fixed term. In exchange for a lump sum payment to a life insurance company, the policyholder receives assured payouts. Historically viewed as a dull and poor-value option, annuities have experienced a resurgence due to several factors:
- Inheritance tax planning: The upcoming reforms have made annuities an attractive tool for minimizing tax exposure on pension funds.
- Improved value: Annuity rates have significantly increased, offering better returns compared to previous years.
- Economic uncertainty: Many individuals are seeking stable and predictable income streams amid volatile market conditions.
Marianna Hunt from Fidelity International highlighted the enhanced value of annuities, noting that a 66-year-old in good health with a £300,000 pension pot could now secure an annuity paying £22,440 annually—a rate of approximately 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.
Historical Context and Future Outlook
Demand for annuities had previously plummeted following the introduction of pension freedoms in 2015, which removed the requirement for individuals to purchase an annuity upon retirement. However, the recent inheritance tax changes and improved product offerings have revitalized the market. With most private pensions and workplace schemes being defined contribution, the implications of these reforms are widespread, affecting millions of savers across the UK.
As the financial landscape continues to evolve, annuities are expected to remain a key component of retirement planning, offering both tax efficiency and income security. The record sales figures underscore a significant shift in consumer behavior, as more people prioritize long-term financial stability and asset protection in response to governmental policy changes.
