Annuities are experiencing a resurgence among wealthy UK savers as rising interest rates and impending inheritance tax reforms reshape retirement planning. Once considered poor value, annuities now offer a way to reduce exposure to inheritance tax while locking in high guaranteed incomes.
Inheritance Tax Changes Drive Interest
Under changes expected from April 2026, unspent pension pots could be included in taxable estates. Estimates suggest around 10,500 more estates will be affected, and 38,500 more will face higher bills. This has prompted retirees to consider annuities as a tax mitigation tool.
An annuity provides a guaranteed income in exchange for a lump sum. Once purchased, the money used to buy it leaves the estate, potentially reducing inheritance tax liability. For example, in a £2 million estate, a £1 million annuity purchase could reduce a £400,000 inheritance tax bill to zero, depending on available allowances such as the nil-rate band and residence nil-rate band.
Additional Tax Advantages
Another advantage is that annuity income can potentially be gifted under “gifts out of surplus income” rules, which may fall outside inheritance tax if conditions are met. This further enhances the tax efficiency for those with sufficient income.
Helen Morrissey of Hargreaves Lansdown told The Telegraph: “Once bought, an annuity cannot be cancelled, so if you make the wrong choice you may regret it. Different providers also offer different incomes, so it is vital to get quotes from across the market rather than opt for the first one you receive.” She added that people should consider whether they need to provide for a spouse after death, and that purchasing power would decrease without inflation-linking.
Rising Demand Among Older Savers
Provider data indicates growing interest from older and wealthier savers. Standard Life reports that annuity quotes over £1 million have doubled since 2024, while enquiries from over-75s have quadrupled, driven in part by tax rule changes.
A 65-year-old spending £1 million on an annuity could receive around £77,000 a year for life, or about £52,000 a year if linked to inflation. Higher payouts are available if purchased later in life, with a 75-year-old potentially receiving close to £98,000 annually. Income levels fall if protection for a surviving spouse is included.
Expert Perspectives on Annuity Value
Tom Minnikin of DJH group’s tax firm Forbes Dawson said: “When George Osborne introduced new pension freedoms, the annuity was seen as a dead dog. With pensions being brought within the scope of inheritance tax, the whole system has been turned on its head again.”
James Baxter, founder of Tideway Wealth, suggested that the “underlying maths have not changed.” His firm’s analysis shows that people need to live beyond 95 to generate a better return than holding gilts inside a drawdown account. “It is better to leave a proportion of something to your family than the certainty of nothing at all,” he added.
Annuity Rates and Market Trends
Annuity rates have rebounded sharply, reaching around 7.6% for a 65-year-old at the start of 2026, up from 4.7% in 2020. As a result, demand has surged, with UK pensioners spending £7.4 billion on annuities in 2025 — the highest level since 2014, according to industry data.
