Annuities

What is an Annuity?

An annuity is a financial product that converts your pension savings into a guaranteed income that lasts for the rest of your life. You exchange a lump sum (typically your pension pot) with an insurance company, and they promise to pay you a regular income, usually monthly, for as long as you live.

Once purchased, an annuity provides complete certainty about your retirement income — you'll know exactly how much you'll receive each month regardless of stock market performance, interest rates, or how long you live. This makes annuities particularly attractive if you want to remove investment risk and guarantee you won't run out of money.

• Guaranteed for life. Your income is guaranteed no matter how long you live — even if you live to 110. The insurance company takes the longevity risk.
• Flexible options. Choose from level, escalating, or RPI-linked income. Add spouse protection and guaranteed periods to suit your needs.
• 25% tax-free cash. Take up to 25% of your pension as tax-free cash before purchasing your annuity with the remainder.

Important to know: Buying an annuity is a permanent decision — you cannot change your mind, get your money back, or switch providers later. The income you're quoted is based on your age, health, lifestyle, and prevailing annuity rates at the time of purchase. Shopping around between different insurance companies is crucial as rates can vary by 20% or more for the same circumstances.

How Annuities Work

1. Decide your requirements. Determine what type of annuity suits you best. Consider whether you want level or increasing income, single or joint-life coverage, and if you want a guaranteed period. Your choices significantly impact the income you'll receive — higher guaranteed income means fewer protections and vice versa.
2. Provide your health and lifestyle information. Complete a health and lifestyle questionnaire. Medical conditions, smoking, high blood pressure, diabetes, and other factors can qualify you for enhanced annuity rates. Don't hide health issues — they could increase your income significantly. Around 60% of people qualify for enhanced rates but many don't realise it.
3. Compare quotes from multiple providers. Shop around. Different insurance companies offer vastly different annuity rates for the same person. The difference between best and worst can be thousands of pounds per year. You're not obliged to buy from your existing pension provider — the Open Market Option allows you to choose any annuity provider.
4. Purchase your annuity. Once you've found the best rate, accept the quote and complete the purchase. Your pension provider transfers your fund to the annuity company. This decision is permanent and irreversible, so ensure you're certain before proceeding.
5. Receive your guaranteed income. Your annuity income starts being paid, typically monthly, directly into your bank account. This continues for the rest of your life. Income is taxed as earnings at your marginal rate; the annuity company will deduct tax before paying you.

Types of Annuities Explained

Level annuity

Provides a fixed income that never changes throughout your lifetime. Offers the highest initial income but stays the same regardless of inflation. Example: £100,000 pension might pay £5,500/year for a 65-year-old male — same amount every year for life. Best for maximising immediate income, those with substantial other income sources.

Escalating annuity

Income increases each year by a fixed percentage (typically 3% or 5%) or in line with inflation (RPI/CPI). Starts lower but grows over time. Example: £100,000 might pay £4,000/year initially with 3% annual increases — by year 10, £5,375/year. Best for protecting long-term purchasing power against inflation.

Joint-life annuity

Continues paying income to your spouse or partner after you die. You choose the percentage they receive — typically 50%, 67%, or 100% of the original amount. Example: if you choose 50% spouse's benefit and die, your spouse receives half the original income for their lifetime. Best for protecting your spouse's financial security.

Enhanced annuity

Offers higher income rates if you have health conditions or lifestyle factors that statistically reduce life expectancy. Around 60% of people qualify. Qualifying conditions include diabetes, high blood pressure, high cholesterol, smoking, obesity, cancer history, heart disease, and many more. Best for those with health issues — could increase income by 20–40%.

Guaranteed period annuity

If you die within the guarantee period (typically 5 or 10 years), payments continue to your estate or beneficiaries for the remainder of the period. Example: with a 10-year guarantee, if you die after 3 years, your beneficiaries receive income for the remaining 7 years. Best for protecting against dying shortly after purchase.

Value protected annuity

If you die, any remaining pension value (your original fund minus income already paid) goes to your beneficiaries as a lump sum. Example: £100,000 annuity, £10,000 paid before death = £90,000 to beneficiaries (less tax if over 75). Best for leaving an inheritance while having guaranteed income.

Investment-linked annuity

Income varies based on the performance of underlying investments. Higher potential returns but your income can fall as well as rise. Less popular than traditional annuities — combines some annuity features with investment risk similar to drawdown. Best for those wanting guaranteed income with potential for growth.

Fixed-term annuity

Pays income for a set period (e.g. 5–10 years) rather than for life. At the end, you receive a lump sum which you can use to buy another annuity or take as income. Example: 10-year term provides income, then returns a maturity value you can reinvest or use as needed. Best for bridge income until State Pension or deferring permanent annuity purchase.

What Affects Your Annuity Rate?

Annuity rates vary significantly based on personal and market factors. Understanding these can help you time your purchase and maximise income:

• Your age. The older you are, the higher your annuity rate. Rates increase significantly with each year you wait, as the insurance company expects to pay out for fewer years.
• Your health and lifestyle. Medical conditions, lifestyle factors (smoking, obesity), and postcode can all increase your rate. Declaring all health issues is crucial — they work in your favour.
• Gender. Women typically receive lower rates than men of the same age because they have longer life expectancy on average. Joint-life annuities consider both partners' ages.
• Gilt yields and interest rates. Annuity rates track government bond (gilt) yields. When gilt yields rise, annuity rates improve. This is why rates have improved significantly since 2022.
• Your pension size. Larger pension pots often receive slightly better rates. Some providers offer enhanced rates for pots over certain thresholds (e.g. £100,000 or £250,000).
• Options you choose. Adding spouse protection, escalation, guaranteed periods, or value protection all reduce your starting income rate in exchange for additional benefits.

Benefits of Annuities

• Guaranteed lifetime income. Know exactly what you'll receive each month for life. No uncertainty, no investment decisions, no worrying about running out of money no matter how long you live.
• Complete peace of mind. Removes all worry about market volatility, longevity risk, or investment management. You can't outlive your income, and it won't be affected by market crashes.
• Simplicity and certainty. Once set up, there's nothing to manage, review, or worry about. Your income arrives automatically every month without any action needed from you.
• Spouse and inheritance protection. Options available to protect your spouse with continuing income and pass on unused funds to beneficiaries if you die early.
• Inflation protection available. Choose escalating or RPI/CPI-linked options to protect your purchasing power over time, ensuring your income keeps pace with rising costs.
• No investment risk. Your income is completely unaffected by stock market crashes, economic downturns, or poor investment performance — it's guaranteed by the insurance company.

Potential Drawbacks to Consider

While annuities offer security, they're not suitable for everyone. Consider these limitations:

• Irreversible decision. Once purchased, you cannot change your mind, access your capital, or switch providers. This is a permanent commitment that cannot be undone.
• No access to capital. Your pension pot is gone — converted into income. You cannot access the capital for emergencies, large purchases, or to help family members.
• Poor value if you die early. If you die shortly after purchase without protection options, the insurance company keeps most of your money. Your estate receives nothing unless you've paid for value protection or a guaranteed period.
• No flexibility. You cannot increase, decrease, or vary your income regardless of changing circumstances. What you choose at purchase is what you get forever.
• Inflation risk (level annuities). If you choose a level annuity, your income stays the same but inflation erodes its purchasing power over time. What seems comfortable today may feel inadequate in 20 years.
• Currently low returns. Although rates have improved since 2022, annuity rates are still relatively low compared to historical standards. You're essentially locking in today's rates forever.

Is an Annuity Right for You?

Annuities may suit you if:

• You value certainty and guaranteed income above all else
• You're uncomfortable with investment risk and market volatility
• You want to remove longevity risk completely
• You don't need access to your pension capital
• You have health conditions that qualify for enhanced rates
• You're in good health with potential for long life
• You want a simple, set-and-forget retirement income
• Current annuity rates provide acceptable income for your needs

Consider alternatives if:

• You want flexibility to access capital or vary income
• You're comfortable managing investment risk
• You want your pension to have potential for growth
• Leaving a large inheritance is a priority
• You have a reduced life expectancy
• Current annuity rates seem poor value to you
• You're young (under 70) and rates might improve further
• You have substantial other guaranteed income (e.g. final salary pension)

Why Shopping Around is Crucial

The difference between the best and worst annuity rates for the same person can be 20% or more. For a £100,000 pension, this could mean an extra £1,000+ per year, every year, for life.

You're not obliged to buy from your existing pension provider. The Open Market Option allows you to shop around all UK annuity providers to find the best rate for your circumstances.

Example scenario: 65-year-old male, £100,000 pension, level annuity — the market range is £5,200–£6,500/year. The difference of £1,300/year is £26,000 over 20 years.

With enhanced rates: the same person with diabetes and high blood pressure could receive up to £7,500/year — health issues can increase income by 30–40%.

Annuities: Frequently Asked Questions

How much does a £100k annuity pay?

A £100,000 annuity typically pays around £5,500–£6,500 per year for a 65-year-old, depending on the type chosen and current rates. Enhanced annuities for those with health conditions can pay 20–40% more. Joint-life and inflation-linked annuities pay less initially but provide additional protection.

Are annuities a good idea in 2026?

Annuity rates have improved significantly since 2022 due to higher interest rates. Whether an annuity is right for you depends on your priorities. If you value guaranteed income and peace of mind over flexibility, an annuity could be an excellent choice. Many people use a mix of annuity and drawdown.

Can you get your money back from an annuity?

Generally, no — buying an annuity is a permanent, irreversible decision. However, value-protected annuities can return remaining funds to beneficiaries if you die early. Some new "flexible" annuities allow limited access to capital, but these typically offer lower income rates.

What is an enhanced annuity?

An enhanced annuity pays higher income to people with health conditions or lifestyle factors that may reduce life expectancy. Conditions like diabetes, high blood pressure, heart disease, and even smoking can qualify you for rates 20–40% higher than standard. Around 60% of people qualify but many don't know to ask.

Should I take an annuity or drawdown?

Consider an annuity if you want guaranteed income, worry about investment decisions, or want to cover essential expenses. Choose drawdown if you want flexibility, potential for growth, or to leave money to beneficiaries. Many experts recommend combining both — using an annuity for baseline needs and drawdown for extras.