How much could £100,000 get you in retirement as pensioners reject best income boost in years

A £100,000 pension pot could currently secure around £7,600 a year through an annuity, according to MoneyHelper figures.

Just five years ago, the same sum would have delivered only £5,000, meaning annual payments have jumped by 52 per cent.

The sharp rise reflects climbing bond yields, which underpin annuity rates, and has significantly improved the value of guaranteed lifetime income products. For those retiring today, it means a far stronger return compared with the low-rate environment seen in recent years.

Yet despite the improvement, demand hasn’t soared in the way many might expect. The proportion of new retirees opting for annuities has slipped to 9.2 per cent in 2024/25, down from 10.1 per cent four years earlier, Financial Conduct Authority data shows.

Even so, the number of annuities sold has climbed, with purchases rising by 46 per cent between 2020/21 and 2024/25 – from 60,383 to 88,430.

This growth, however, has not kept pace with the wider retirement market, highlighting how many savers continue to prefer the flexibility of drawdown despite higher annuity rates.

Total pension access surged by 61 per cent during the same timeframe, climbing from 596,080 to 961,575 individuals. This disparity means annuities have lost market share despite offering markedly better value.

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Laith Khalaf, AJ Bell’s investment analysis chief said: "What's remarkable is this has happened despite a phenomenal increase in annuity rates."

The persistent unpopularity suggests pensioners' retirement choices aren't primarily driven by financial returns.

This marks a sharp contrast with the situation before 2015, when the vast majority of retirees, around nine in 10 bought annuities. That all changed after then-Chancellor George Osborne’s pension freedoms gave savers the option to use flexible drawdown instead.

So why aren’t more people choosing annuities now, despite higher rates? Mr Khalaf points out that many pensioners already have a guaranteed income from the state pension or defined benefit workplace schemes, meaning they don’t need the extra security an annuity provides.

Another issue is flexibility. Annuities pay a fixed income for life, regardless of circumstances. While this offers certainty, it also means retirees can’t increase withdrawals in the early years of retirement when spending tends to be higher, or cut back later as lifestyles change.

There are tax considerations too. With annuities, payments are fixed and can’t be adjusted to stay within lower tax brackets. In contrast, drawdown allows people to vary how much they take out each year, offering more control over tax bills.

"Annuities aren't flexible. They pay out an income year in, year out, irrespective of whether you need it or not," Mr Khalaf explains.

Adding inflation protection dramatically erodes annuity value, with annual income plummeting from £7,600 to approximately £5,000 for a £100,000 pension pot, MoneyHelper calculations show. This reduction makes inflation-linked annuities less competitive against alternative retirement strategies.

Drawdown plans present a more appealing proposition for many retirees, offering potential four per cent yields through equity income funds whilst maintaining capital control. These arrangements provide some inflation hedging through long-term stock market appreciation, though investment risks remain.

Mr Khalaf said: "Given you can get a four per cent yield on an equity income fund while also retaining control of your capital, and some inflation protection from stock market growth over the long term, that swings the pendulum in favour of a drawdown plan."

The substantial cost of inflation-proofing annuities effectively negates much of the recent rate improvements.

Deep-seated psychological resistance represents perhaps the most formidable obstacle to annuity adoption. Many retirees struggle with the concept that their accumulated savings could vanish upon death, leaving nothing for beneficiaries.

Mr Khalaf added: "People really don't like annuities. Mostly it's probably the case people don't like the idea that if they get run over by a bus, their income stops and all those years of saving into a pension were for nothing."

Whilst protection features like guarantee periods or spousal benefits exist, these safeguards further diminish already-reduced income levels. Some retirees also underestimate their longevity prospects, failing to appreciate potential decades of guaranteed payments.

The combination of inflexibility, inflation concerns and emotional barriers ensures annuities remain unappealing despite headline rates that would have seemed extraordinary just years ago.

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