The sale of annuities – which provide a guaranteed income for life – surged 22% in the first three months of 2023.

Between January and March 2023, 16,256 annuities were bought which is the largest number recorded since 2019, according to the Association of British Insurers (ABI).

Meanwhile, annuity premiums for the quarter totalled £1.2bn which is the highest value since 2015 when pensions freedoms were introduced. These freedoms give savers more flexibility when it comes to accessing their retirement income, so they’re no longer required to take out an annuity.

The trade body for long-term savings and protection also revealed that the figures were bolstered by more people ‘shopping around’ to get the best deal.

For the first time since 2016, more than 10,000 people bought an annuity from a different provider to the one holding their pension savings. This made up 64% of sales totalling £847m, up on the 55% of sales through an external provider in the same period in 2022.

Further, given the high inflation rate, pension savers are also increasingly turning to escalating annuities which provide an income that increases every year, with the ABI revealing this product grew 23%.

Yvonne Braun, ABI director of long-term savings policy, said: “Annuities offer a guaranteed income for life, like a final salary pension scheme. It’s great to see more people taking advantage of the protection annuities have to offer, especially given the current favourable rates. Securing a guaranteed income for life remains an important part of the mix of options for people to consider at and during retirement.”

‘Closest thing to free money’

Stephen Lowe, group communications director at retirement specialist Just Group, said: “It’s encouraging to see nearly two-thirds of retirees used their right to shop around and to switch away from their existing pension savings provider to a more competitive provider of annuities, although that still shows around a third are likely to be missing out on extra income.

“Shopping around is particularly important because it’s the closest thing to ‘free money’ in the retirement world and staying loyal to a provider can cost you dearly.”

Lowe added that the gap between the top and bottom providers has widened to the point that a healthy 65-year-old can gain nearly 14% more annual income by securing the best instead of the worst rate, and potentially an even higher income depending on lifestyle factors and medical history.

Annuity rates could rise further

The swaps market is now pricing in three or possibly four more Bank of England base rate rises to a peak of 5.5% – up from 4.8%, annuities rates could increase further, adding to the reason why it really pays to shop around to get the best deal.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Inflation is proving a tricky beast to tame with the expectations of further interest rate rises growing. Annuities have been a major beneficiary of the interest rate hiking cycle so far, with incomes rising to the best levels seen in over a decade in recent months.

“It’s not a foregone conclusion that annuity incomes will rise off the back of any further expectations for interest rate rises but it is a distinct possibility.

“Annuities have an important role to play in helping people secure a level of guaranteed income for retirement but for many years people have been put off by the low incomes on offer. It is hugely positive to see how these incomes have risen over the past year which will prompt people who may have been hesitant before to take a closer look.”