Unspent pension pots could be included in taxable estates (Image: Getty)
Annuities are back in focus for wealthy UK savers as rising rates and upcoming inheritance tax changes reshape retirement planning.
Once seen as poor value, annuities are now regaining popularity as interest rates climb and pension “death tax” reforms threaten to pull more estates into inheritance tax. Under changes expected from April, unspent pension pots could be included in taxable estates, with estimates suggesting around 10,500 more estates will be affected and 38,500 more facing higher bills.
Some retirees are responding by using annuities to reduce exposure to inheritance tax while locking in high guaranteed incomes.
An annuity provides a guaranteed income in exchange for a lump sum payment. Once purchased, the money used to buy it leaves your estate, potentially reducing inheritance tax liability.
For example, in a £2million estate scenario, a £1million 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.
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.
Retirees could be exposed to inflation risk and losing out if they die early (Image: Getty)
Despite their tax appeal, annuities come with trade-offs.
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.”
The expert added that people should consider whether they need to provide for their spouse after you die, and that purchasing power would decrease without inflation-linking.
Provider data suggests rising interest from older and wealthier savers. Standard Life reports that annuity quotes over £1million have doubled since 2024, while enquiries from over-75s have quadrupled, driven in part by tax rule changes.
Income levels will fall if protection for a surviving spouse is included (Image: Getty)
A 65-year-old spending £1million 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.
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 investment management firm 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 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 £7.4bn on annuities in 2025 — the highest level since 2014, according to industry data.
