An annuity provides the one thing no other retirement product can: a guaranteed income for life. While pension drawdown has become more popular since the 2015 pension freedoms, annuities remain an important option — especially for those who value certainty and security in retirement.
How Annuities Work
- You reach retirement age (currently 55, rising to 57 in 2028)
- You take your 25% tax-free lump sum from your pension
- You use some or all of the remaining pot to buy an annuity
- The insurer pays you a guaranteed income for the rest of your life
- Income is taxed as earned income (like a salary)
Annuity Rates
Annuity rates vary by age, health, and type. Typical rates for a single life, level annuity (no inflation protection):
| Age | Approximate Annual Income per £100,000 |
|---|---|
| 55 | £4,500–£5,500 |
| 60 | £5,500–£6,500 |
| 65 | £6,500–£7,500 |
| 70 | £7,500–£9,000 |
| 75 | £9,000–£11,000 |
Rates change with economic conditions (particularly gilt yields and interest rates). Higher interest rates generally mean better annuity rates.
Types of Annuity
By Income Pattern
| Type | Feature | Impact on Income |
|---|---|---|
| Level | Same payment every year | Highest starting income, but loses value to inflation |
| Escalating | Increases by fixed % annually (e.g. 3%) | Lower starting income, grows over time |
| RPI-linked | Increases with inflation | Lowest starting income, maintains purchasing power |
By Life Coverage
| Type | Feature | Income Level |
|---|---|---|
| Single life | Pays only to you | Highest income |
| Joint life | Pays to you, then continues (usually at 50-67%) to your spouse/partner | Lower income |
By Guarantee Period
| Feature | Effect |
|---|---|
| No guarantee | Payments stop on death |
| 5-year guarantee | Pays for at least 5 years (to beneficiaries if you die sooner) |
| 10-year guarantee | Pays for at least 10 years |
| Value protection | Returns some of the original purchase price on death |
Enhanced Annuities
If you have health conditions, smoke, or live in an area with lower life expectancy, enhanced or impaired life annuities pay a higher income — because the insurer expects to pay for fewer years.
Common qualifying conditions:
- Heart conditions, diabetes, cancer history
- Smoking or heavy alcohol consumption
- High blood pressure, high cholesterol
- BMI significantly above normal
- Living in certain postcodes
Enhanced annuities can pay 10–40% more than standard rates. Always disclose health information when obtaining quotes.
Annuity vs Drawdown
| Feature | Annuity | Drawdown |
|---|---|---|
| Income guarantee | Yes — for life | No — depends on investment performance |
| Investment risk | None (borne by insurer) | You bear the risk |
| Flexibility | None (fixed once purchased) | Full — vary withdrawals as needed |
| Inflation protection | Optional (at lower starting income) | Potential for growth |
| Death benefits | Limited (guarantee period/joint life) | Remaining pot passed to beneficiaries |
| Simplicity | Very simple | Requires ongoing management |
| Best for | Those who value certainty | Those comfortable with risk |
Shopping Around: The Open Market Option
Never accept your pension provider’s annuity offer without comparing. Shopping around can increase your income by 10–20%:
- Request an annuity quote from your current pension provider
- Use comparison services (MoneyHelper, annuity brokers) to get competing quotes
- If you have any health conditions, request enhanced annuity quotes
- Compare like-for-like (same type, term, features)
- Choose the best rate
Annuity brokers (e.g. Retirement Line, Annuity Bureau) search the whole market for you — typically at no cost (they receive commission from the insurer).
When to Consider an Annuity
Good reasons to buy:
- You want guaranteed income regardless of market performance
- You are risk-averse and would worry about drawdown
- You have no dependants who need to inherit your pension
- You have poor health (enhanced rates can be very competitive)
- You want simplicity — set it and forget it
- You have enough other assets in flexible wrappers (ISAs, drawdown)
Consider alternatives if:
- You want flexibility to vary your income
- You want to leave maximum inheritance to beneficiaries
- You are in good health and may live longer than average
- Interest rates and annuity rates are very low at the time of purchase
- You have other guaranteed income (state pension, defined benefit pension)
The Hybrid Approach
Many financial planners recommend a combination:
| Pot Allocation | Purpose |
|---|---|
| 25% | Tax-free lump sum |
| 30–40% | Annuity for guaranteed baseline income |
| 35–45% | Drawdown for flexibility and growth |
This ensures essential expenses are covered regardless of markets, while maintaining flexibility for extras.
Tax on Annuity Income
Annuity income is taxed as earned income through PAYE:
- Personal allowance: first £12,570 tax-free
- Basic rate: 20% on income £12,571–£50,270
- Higher rate: 40% on income above £50,270
Combine with your state pension and any other income to determine your effective rate. Plan withdrawals across sources to minimise tax. See our retirement income guide for detailed tax planning.