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. Rates differ between insurance companies for the same circumstances, so comparing quotes matters.

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. Declaring your health and lifestyle details in full can increase the income you are offered.
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: Legal & General's September 2026 figures: £100,000 buys £7,435 a year at 65 on a single-life level annuity with a 10-year guarantee. The 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 or in line with inflation (RPI/CPI). Starts lower but grows over time. Example: Legal & General's September 2026 figures: £100,000 buys £5,022 a year at 65 if the income rises with RPI, against £7,435 if it stays level. 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. Legal & General's September 2026 figures show £6,843 a year at 65 from £100,000 on a joint-life basis (the spouse's percentage is not stated), against £7,435 for a single life. 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. Qualifying conditions include diabetes, high blood pressure, high cholesterol, smoking, obesity, cancer history, heart disease, and many more. Best for those with health or lifestyle factors. They can pay more. For example, Legal & General's September 2026 figures show £7,767 a year at 65 for a smoker, against £7,435 with no health issues. See current annuity rates.

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). From 6 April 2027 it can also count towards the estate for inheritance tax. 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. Rates can differ slightly with the size of the pot. Aviva's published examples by pot size show how much.
• 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.
• Rates are locked in. The rate is fixed on the day you buy. Standard Life (Phoenix Group)'s tracker put the average at 65 at 7.75% in July 2026, up from 7.66% in April 2026. Rates move with gilt yields, so a later purchase could be on better or worse terms.

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 are not ready to commit yet: rates rise with age, and an annuity can be bought later
• You have substantial other guaranteed income (e.g. final salary pension)

Why Shopping Around is Crucial

Annuity rates differ between insurers for the same person, and the offer from your existing pension provider may not be the best available. MoneyHelper recommends comparing quotes before you buy.

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.

Published examples: Published examples for £100,000 at 65, level income: Legal & General £7,435 (single life, 10-year guarantee, September 2026); Aviva £7,149.19 (single life, 5-year guarantee, rates as at February 2026); Standard Life (Phoenix Group) tracker market average 7.75% (July 2026).

With health or lifestyle factors: Legal & General's September 2026 figures show £7,767 a year at 65 for a smoker, against £7,435 with no health issues. Enhanced annuities for medical conditions can pay more again; the figure depends on your own details.

These are the providers' own published examples on the assumptions stated, not quotes. See every figure, with its source and date.

Annuities: Frequently Asked Questions

How much does a £100k annuity pay?

It depends on the provider, your age and the options you choose. Legal & General's September 2026 figures show £7,435 a year at 65 for a single-life level annuity with a 10-year guarantee, £5,022 if the income rises with RPI, and £6,843 on a joint-life basis. Standard Life (Phoenix Group)'s tracker put the market average at 65 at 7.75% in July 2026. These are published examples, not quotes.

Are annuities a good idea in 2026?

That depends on your priorities. Rates are much higher than before 2022: Standard Life (Phoenix Group)'s tracker put the average at 65 at 7.75% in July 2026. If you value a guaranteed income over flexibility, an annuity may suit you; some people use a mix of annuity and drawdown.

Can you get your money back from an annuity?

Generally, no. Buying an annuity is usually a permanent, irreversible decision. Value-protected annuities can return remaining funds to beneficiaries if you die early, and a guarantee period keeps payments going for a set time.

What is an enhanced annuity?

An enhanced annuity pays a higher income to people whose health or lifestyle may shorten their life expectancy, for example some medical conditions or smoking. Legal & General's September 2026 figures show £7,767 a year at 65 for a smoker, against £7,435 with no health issues. Declaring your health details when you get quotes is how you find out whether you qualify.

Should I take an annuity or drawdown?

An annuity gives a guaranteed income and removes investment risk; drawdown keeps flexibility, growth potential and the chance to leave money to beneficiaries, but the pot can run out. Some people combine both, using an annuity for essential spending and drawdown for the rest.