Annuities Are Making a Comeback as Retirees Seek Guaranteed Income

What happened?

Annuity sales have risen substantially in the United States and the United Kingdom over the past three years, reversing a long decline that began during the era of near-zero interest rates following the 2008 financial crisis. Industry data from LIMRA in the US shows total annuity sales reaching record levels in recent years, while UK annuity sales, tracked by the Association of British Insurers, have also climbed sharply since interest rates began rising in 2022, reflecting improved payout rates that make guaranteed-income products more competitive for retirees weighing their options at retirement.

The renewed interest comes as many retirees, having lived through a volatile period for stock and bond markets, express greater appetite for predictable income they cannot outlive, even as financial advisers continue to debate the appropriate role of annuities within a broader retirement income strategy.

Key points

• LIMRA, a US insurance industry research body, has reported record or near-record annual annuity sales in recent years, driven largely by fixed and fixed-indexed annuities.
• UK annuity sales have risen substantially since 2022 as interest rates increased, reversing a decade-long decline that followed 2015 pension freedom reforms.
• Higher interest rates directly improve annuity payout rates, since insurers can generate more income from the bonds backing annuity contracts.
• Financial regulators including the UK’s Financial Conduct Authority have continued to emphasise the importance of shopping around between providers, since payout rates can vary significantly for similar contracts.
• Consumer advocates caution that annuities are irreversible in most cases and typically offer no inheritance value once the purchaser and any named survivor have died, unlike many other retirement assets.

What we know

Annuities are financial products, typically sold by insurance companies, that convert a lump sum into a stream of guaranteed income, usually for the remainder of the purchaser's life. Their attractiveness is closely tied to prevailing interest rates, because insurers generally invest the premiums they receive in bonds and use the resulting yield to fund the promised payments; when interest rates rise, insurers can offer higher payout rates for a given lump sum, and when rates fall, payout rates fall correspondingly.

The period of near-zero interest rates from roughly 2009 to 2021 made annuities unusually unattractive relative to historical norms, contributing to a sharp decline in sales, particularly in the UK following 2015 pension freedom reforms that removed the previous requirement for most defined-contribution pension savers to purchase an annuity at retirement. As interest rates rose sharply from 2022 in response to inflation, annuity payout rates improved accordingly, and sales data from both LIMRA and the ABI show a marked rebound.

Background

Annuities have a long history in retirement planning, historically serving as one of the primary ways retirees converted pension savings into a predictable income stream, particularly in the UK where annuity purchase was effectively mandatory for most defined-contribution pension holders before 2015. The pension freedom reforms of that year gave UK retirees far greater flexibility to draw down pension savings directly rather than purchasing an annuity, a change broadly welcomed for expanding choice but one that also exposed some retirees to greater investment and longevity risk than the guaranteed-income model provided.

In the United States, annuities have never been mandatory but have long been marketed as a supplement to Social Security and employer pension income, particularly as traditional defined-benefit pensions have become less common in the private sector, shifting more retirement income responsibility onto individual retirement accounts and personal savings that do not inherently provide guaranteed lifetime income.

Detailed analysis

The renewed appeal of annuities reflects both the mechanical effect of higher interest rates on payout rates and a behavioural shift among retirees following a volatile period for markets, including the sharp 2022 bond and equity market declines that eroded some retirement portfolios just as many members of the large baby boomer generation were reaching retirement age. Behavioural finance research has long found that retirees place a high value on income certainty, sometimes described as ‘longevity risk aversion,’ even when a pure expected-value analysis might favour continued market investment, and this preference appears to have strengthened after a period of market turbulence.

Financial advisers generally recommend annuities be considered as one component of a diversified retirement income strategy rather than a complete solution, given their drawbacks: most fixed annuities offer no inflation protection unless a specific inflation-linked option is purchased, which reduces the initial payout rate; funds committed to an annuity are generally illiquid and cannot be accessed for unexpected expenses; and, particularly with more complex products such as fixed-indexed or variable annuities, fees and surrender charges can be substantial and difficult for consumers to fully understand without professional guidance. Regulators in both the UK and US have highlighted these complexity and fee concerns as ongoing consumer protection issues, distinct from simpler fixed annuities where terms are more transparent.

A commonly cited strategy, sometimes called annuity laddering, involves purchasing annuities incrementally over several years rather than committing an entire retirement lump sum at a single interest-rate environment, spreading interest-rate risk in a manner similar to bond laddering strategies. Financial planning research has also increasingly explored partial annuitisation — covering essential living expenses with guaranteed annuity income while keeping the remainder of retirement savings invested for growth and liquidity — as a way to capture the benefits of guaranteed income without fully sacrificing flexibility.

Why it matters

The revival of annuity demand reflects a broader challenge facing retirees globally as defined-benefit pensions become rarer and individuals bear increasing responsibility for managing their own retirement income and longevity risk. Whether annuities represent good value for a given retiree depends heavily on individual circumstances, including health, other income sources and risk tolerance, making informed comparison shopping and professional guidance particularly important given how consequential and largely irreversible the decision to purchase an annuity typically is.

For the insurance industry, higher annuity sales volumes represent a significant and growing business line, and product innovation — including hybrid products combining guaranteed income with some market participation — is likely to continue as insurers compete for a growing pool of retiring baby boomers in the US, UK and other ageing economies.

What happens next?

Annuity sales are likely to remain sensitive to the future path of interest rates; if central banks in the US, UK and eurozone begin cutting rates further as inflation moderates, payout rates would likely decline correspondingly, potentially cooling current demand. Financial regulators are expected to continue scrutinising disclosure and fee transparency in more complex annuity products, particularly indexed and variable annuities marketed with features that can be difficult for average consumers to evaluate.

Expect continued growth in partial annuitisation strategies and hybrid products as financial advisers and insurers respond to retiree demand for both guaranteed income and continued investment flexibility, rather than an either-or choice.

Insight Media Opinion

Insight Media Opinion: The revived interest in annuities is a rational response to a genuine gap in most people's retirement planning — the risk of outliving savings — and higher interest rates have made that protection more affordable than it has been in years. Retirees who have never considered annuities are right to take a fresh look, particularly for the portion of income needed to cover essential fixed expenses.

That said, readers should treat annuity sales pitches with the same scepticism warranted for any high-commission financial product, and should specifically compare payout rates across multiple providers before committing, given how much they can vary for similar contracts. Simple, transparent fixed annuities generally serve most retirees better than complex indexed or variable products laden with fees that are difficult to fully understand — when in doubt, simpler is usually the safer choice for money that, once committed, cannot easily be recovered.