Tempus Fugit and the Life and Times of Annuities

Over time, fashions come, they go, and then at some point they are reassessed and come back into vogue. There are not many exceptions to this rule… Even flared trousers are having another day in the sun! But “what has this got to with annuities?” (otherwise known as guaranteed lifetime pensions), you might ask.

Well, previously, when people retired they were expected – and almost forced – to take pensions or annuities with no real choices from their employer. All this changed with the budget of 1989, when Nigel Lawson announced new investment freedoms for ‘personal pensions’, and Self Invested Personal Pensions (SIPPs) were born. This was subsequently developed by the Pensions Freedom Act of 2015, which granted individuals greater control and flexibility over their pension savings.

Annuities have been around since pensions began for ordinary people and extend as far back in time – examples include sailors and soldiers receiving ‘Pensions’ from the Royal Navy or Army during the time of Nelson and Wellington for long service.

The principle remains the same, which is that we all need an income in retirement to pay the bills. An annuity still has a major attraction: a guaranteed income at a set rate for your lifetime.

So, why did annuities go out of fashion?

In October 1990, annuity rates were as high as 15%. As an example, a 65 year old placing £100,000 into an annuity could expect to receive £15,000 per annum, before tax for the rest their life.

Yet, by October 2020, the same £100,000 in annuity would only generate £4,000 per annum. This is an enormous difference, which highlights the close connection between interest rates and government bond rates which determine the rate of interest that annuity providers are able to offer.

The 2015 legislation sought to address concerns that annuities were rigid and expensive. After all, why would you purchase an annuity that you could never adjust after inception?

This inflexibility and the massive decline in interest rates, coupled with personal pension and SIPP freedoms, allowed the public to replicate the income stream provided by annuities (albeit without the guarantees) and have the flexibility to vary benefits and payments going forward at will. Additionally, when they died, the money left in the fund was still available to other beneficiaries, such as their children.

Unsurprisingly, annuities fell out of fashion on a fairly significant scale. The general public wanted to control their own pensions and moneys. This change was also accelerated by the continuing demise of “Final Salary” pension schemes, with employers closing them down and setting up Defined Contribution schemes. In such schemes, it is employees who shoulder the investment risk and volatility, rather than the employer.

Why should they now be reconsidered by more people?

So, why bother with annuities at all? The rationale for considering annuities is to revisit their benefits and look at the macroeconomics and interest rate cycles.

For the last three years, from 2022 until the most recent cuts, interest rates were on the rise. During this period, annuity rates increased in line with this rise, and you may be surprised to learn how that has manifested itself in terms of what you could receive for aforementioned example of £100,000.

On 1 May 2025, a 65-year-old could have achieved a 7.73% rate guaranteed from Aviva.  A 70-year-old 8.57% from Legal and General and a 75-year-old 9.86% from Legal and General. These are a marked increase from the low rates on offer in October 2020.

As we get older, we generally become less risk-tolerant, particularly in respect of having sufficient funds on which to live. Turmoil in economic markets certainly doesn’t help with this, as we have witnessed recently.

With this backdrop in mind, if you can purchase an annuity as part of an overall strategy to ensure your income needs going forward are met with a high degree of certainty, it would probably be remiss not to consider an annuity with the rates currently on offer.

This is particularly relevant now, as it would appear the interest rate cycle is now in a reduction phase, and annuity rates are beginning to fall. Even from April 2025 to May 2025, the reduction in rates was of the order of 0.22%, with more predicted rate cuts likely to occur.

If annuities were not previously on your radar – as with most pension investors due to the previously very low returns – it may well be a good time to take a fresh look at them.

Time to revisit annuities

Five years is a long time in economics. Any decisions taken that long ago regarding annuities, as well as opinions and negative preconceptions that formed around them, are worth revisiting. This is especially true as, since you are five years older, you will be looking at a far greater certain return than before.

Of course, any retirement income strategy is still a tricky financial maze to navigate. We can help with this by assisting you in defining your present and future income needs and taking into consideration all other factors, such as inheritances that you may wish to build into your financial plan.

If you have any questions at all regarding your retirement and the potential role that annuities could play, please don’t hesitate to get in touch with Iain Muffitt, Edward Fowle, or your usual Mercer & Hole contact. Our Financial Planning team is here to help you plan for your future.