What recent annuity demand tells us about modern retirement planning

Recent market data shows a clear shift in retirement behaviour: annuity purchases have increased significantly, and the average pension pot used to buy an annuity has risen to levels not seen before.

However, this trend does not indicate a return to traditional, “one‑size‑fits‑all” retirement models. Instead, it reflects a more considered response to a changing planning environment.

A changing role for pensions in long-term planning

As highlighted in our recent insight, the rules governing pension death benefits will change from April 2027. Based on draft legislation, this represents a significant shift from the current rules, under which pensions have largely sat outside the inheritance tax net.

Against this backdrop, it is understandable that people are revisiting how pensions are used. The rise in annuity sales suggests that some individuals are choosing to take income from their pension during retirement, rather than leaving large balances untouched and potentially exposed to future inheritance tax.

Pensions can be an efficient savings tool for tax purposes, the focus has instead shifted on reconsidering their place within a comprehensive retirement and estate planning strategy.

Tax treatment depends on individual circumstances and may change in the future.

Managing the risk of higher future tax exposure

There is a risk that, from April 2027, pensions passed on to beneficiaries could be subject to both inheritance tax and income tax, potentially leaving families with a much smaller benefit.

For some, the income certainty provided by an annuity during their lifetime may enable more focus on inheritance tax planning with wider non-pension assets. It could also be a sensible means of providing a spouse with a set income when you die, if there is a pension imbalance between spouse’s. However, this is not a universal solution and needs to be considered carefully alongside other options.

The key point is that pension decisions can no longer be viewed in isolation from estate planning.

A more balanced approach

Recent figures reported by the Association of British Insurers, show that annuity growth is being driven mainly by larger pension pots. This suggests that people are not treating annuities as an all‑or‑nothing decision. Instead, many are using them as part of a wider plan, locking in reliable income for everyday spending, while keeping the rest of their pension savings flexible.

In practice, this can mean:

• Using an annuity to cover essential living costs OR where a fixed income is required to cover certain expenditures
• Retaining flexibility elsewhere through drawdown or other investments
• Reducing reliance on market performance for day-to-day income
• Supporting longer-term planning in light of future tax changes

What this means for you

The message is not that annuities are suddenly right for everyone. Instead, the record sales figures are a reminder that assumptions made in the past may need reviewing in light of better returns and the value income certainty may provide.

This makes it a good time to step back and review your own position:

• How secure is your current retirement income?
• How might the inclusion of pensions within your estate affect your family?
• Are your pension nominations and wider estate plans still up to date, and are you relying on tax rules that may change from April 2027?

Taking the time to review your arrangements now, and making small, considered adjustments where needed, can make a meaningful difference to long‑term outcomes for both you and your family.

Joined up planning matters

More than ever, decisions around pensions and inheritance tax are closely linked. Choices made about income today can have lasting effects on flexibility, tax efficiency and the legacy you leave behind. Especially given that the spousal transfer of pensions and annuities remains a tax-free gift; and is reassessed on the second death.

For inheritance tax, the importance is that now a joined‑up approach needs to look at both retirement and estate planning in conjunction, rather than in isolation. For clients, the opportunity lies in understanding what this shift means for your own circumstances whilst ensuring your plans continue to support your goals, both in retirement and for the next generation.

We’re here to help

Pension, annuity and estate planning decisions are closely linked, with the right approach shaped by your goals, circumstances and family needs. Our specialists can clarify the upcoming changes, model their impact on your plans, and help you explore options such as annuities, drawdown strategies, inheritance tax planning and lifetime gifting.

If you would like support reviewing your arrangements or simply want to understand what these trends and rule changes mean for you, our pension planning team is here to help.

Get in touch to discuss your plans and ensure your retirement and legacy strategy remains robust, efficient and future ready.

Important Information

• This article does not constitute financial advice
• Whether annuity is suitable depends on individual circumstances
• Annuity rates can change and may be lower in the future
• Once purchased, an annuity income is fixed for life and cannot normally be altered or cancelled
• Inflation may reduce the real value of your income over time unless an inflation linked annuity is selected
• The value of pension investments can fall as well as rise and you may get back less than invested.
• Pension rules, including tax and death‑benefit rules, may change.
• You should seek regulated financial advice before making any decisions relating to pension or retirement income.