Quantum Advisory, the leading pensions and employee benefits consultancy for small and medium sized employers, is highlighting the impact of changing annuity rates on the pension saving population as they plan for and enter retirement.
Annuity rates have surged to their highest point in a decade, continuing an upward trend. The Standard Life Annuity Rates Tracker shows that the average rate for a single life annuity in May 2025 was 7.72% for a healthy 65-year-old, rising from 7% in May 2024. The average rate for 60 and 70-year-olds has also increased to 7.01% and 8.54% respectively.
Savers over the age of 55 can purchase an annuity which provides peace of mind as a regular guaranteed income in retirement, either for a fixed period or for life.
The annuity rate calculates the amount of income that an individual receives, with the latest figure suggesting that a healthy 65-year-old with a £100,000 pension pot would receive £7,720 annually from their lifetime annuity.
Stuart Price, Partner and Actuary at Quantum Advisory, said: “Driven by long-term high interest rates and gilt yields, annuity rates are at their highest level in years. This makes annuities an attractive option for those currently approaching retirement who wish to have a secure, guaranteed regular income.
“However, while annuities offer a guaranteed income that won’t run out, savers should explore the full breadth of options available to them. As you cannot change your mind after buying a lifetime annuity, it’s important to understand the different types of annuity being offered and perhaps combine it with another method such as drawdown to retain a level of flexibility over the funds from your pension pot.
“Additionally, while the current high rate may prompt more people to consider annuities, there are some instances in which rates will be lower depending on certain circumstances. These include if individuals increase their annuity during retirement to protect against inflation or, in the cases of joint annuities, the income is planned to continue being paid to a beneficiary upon an individual’s death.”
Frozen income tax thresholds are another element individuals entering retirement need to be aware of. Income tax thresholds have been frozen since the 2021 Spring Budget, with subsequent Chancellors extending the freeze to 2028.
Stuart Price added: “Since the initial freeze in 2021, the number of pensioners that are being pulled into paying income tax has increased. HMRC estimates that 8.7 million taxpayers will be over state pension age in 2025/26, an increase of 29% from 2021/22, with the state pension and workplace pensions often taking individuals over the standard tax-free personal allowance.
“As pensions have increased while income tax thresholds have been frozen, more pensioners are being affected by the phenomenon of fiscal drag and paying income tax.
“Individuals can usually take up to 25% of the total value of their defined benefit pension or defined contribution pot as a tax-free lump sum, with the remainder taxable as regular income when it is taken. If you take a larger amount from your pension in a single tax year and you have used all of your tax-free lump sum allowance, it is likely that you would pay income tax, maybe even at a higher rate.
“It is clear that financial education is vital to support individuals to make an informed choice regarding their retirement, and that more needs to be done to stress the importance of having a secure income in retirement on top of the state pension while managing the tax implications.”
