Annuities — buying a guaranteed income for life

What an annuity actually is

A lifetime annuity is a simple trade: you hand an insurer a lump of pension money, and it pays you a guaranteed income for the rest of your life — however long that turns out to be. The insurer pools thousands of buyers; those who die early subsidise those who live to 100. That pooling is the product. No investment portfolio can promise the same thing, because a portfolio doesn’t know when you’ll die.

Annuities spent a decade being dismissed — rock-bottom interest rates made the income look miserable next to drawdown. That era is over. Rates are set largely by gilt yields, and with yields well off their lows, a healthy 65-year-old buying a single-life level annuity gets roughly £7,000 a year per £100,000 at the time of writing — figures that change with markets and your age, so treat that as an anchor, not a promise.

The catch, and it’s a real one: the decision is irreversible. Once bought, there’s no changing your mind, no lump sum to leave behind (beyond the protections below), and no upside if markets boom. That’s why the strongest plans usually blend an annuity with drawdown rather than choosing one religion — more on that at the end.

The choices that shape your quote

Every option below buys certainty and costs starting income. None is “correct” — but you should choose them deliberately, because they’re locked in forever.

• Single life vs joint life. Single life pays more but stops dead when you do — a surviving partner gets nothing. Joint life continues paying a chosen percentage (typically 50%, 66% or 100%) to your spouse or partner for their lifetime. If anyone depends on this income, joint life is usually the honest choice, and the cost is smaller than people expect. Remember the survivor also keeps their own State Pension — size the survivor percentage against what they’d actually need.
• Level vs escalating. A level annuity pays the same £ amount forever — biggest starting income, but inflation quietly eats it: at 3% inflation, its buying power roughly halves over 24 years. Escalating annuities rise each year, either by a fixed rate (3% or 5%) or with RPI, and start much lower — an inflation-linked income can start 30–40% below the level quote and takes well over a decade to catch up. There’s no free lunch here, only a question of which risk you’d rather hold. (The State Pension is already triple-locked, which covers part of your inflation exposure for free.)
• Guarantee period. Pays the income for a minimum term (5, 10, even 30 years) even if you die early — die in year 3 of a 10-year guarantee and your beneficiaries receive the remaining 7 years. Cheap insurance against the “bought Monday, died Tuesday” nightmare; a 10-year guarantee typically costs only a small slice of income.
• Value protection. Returns the original purchase price minus income already paid as a lump sum on death. More protection than a guarantee period, at a bigger cost to income.

Enhanced annuities — being unhealthy pays

This is the least-known and most valuable fact on this page: annuities pay more if your life expectancy is shorter, and insurers price for it individually. Smoking, diabetes, high blood pressure, high cholesterol, heart conditions, cancer history, even weight and postcode can qualify you for an enhanced (or “impaired”) annuity paying 10–30%+ more than a standard quote — sometimes far more for serious conditions.

Around half of annuity buyers could qualify for some uplift, and many never ask. Always complete the health and lifestyle questionnaire fully and honestly when getting quotes. There is no downside: unlike life insurance, being in bad health can only raise what you’re offered.

Never accept your provider’s first quote

Your pension provider will happily quote you its own annuity, and you are under no obligation to take it. The open market option — your legal right to shop the whole market — routinely finds incomes 10–20% higher than the incumbent’s offer, on identical terms. On a £100,000 purchase that’s potentially £1,000+ a year, every year, for life. It is probably the highest-paid hour of admin in UK retirement.

How to shop:

1. Start with MoneyHelper’s free annuity comparison tool (the government-backed service) to see live quotes across providers for your exact age, health and options.
2. Get the same options quoted everywhere — single/joint, escalation, guarantee period — so you’re comparing like with like, and disclose health conditions to every provider.
3. Consider an annuity broker or regulated adviser for larger purchases; they can access the whole market and handle the underwriting. Check whether they charge a fee or commission, and how much.
4. Check old policies for guaranteed annuity rates first. Pensions from the 1980s–90s sometimes carry guaranteed rates far above today’s market — sometimes double. Ask the provider before moving anything (the SIPP consolidation guide covers what else to check).
5. Quotes are only valid for a couple of weeks — rates move with gilt yields — so do the shopping in one concentrated burst.

Free, impartial guidance is available from Pension Wise (part of MoneyHelper) for over-50s — worth booking before any irreversible decision.

The mechanics: tax, timing and safety

• Tax-free cash still applies. You can take up to 25% of the pot tax-free first and annuitise the rest. The annuity income itself is taxed as income through PAYE, on top of State Pension and any other income.
• Buying a lifetime annuity does not trigger the MPAA, so unlike flexi-access drawdown withdrawals it doesn’t cut your future pension contribution allowance to £10,000 (see the pension tax relief guide) — relevant if you’re semi-retiring.
• You don’t have to annuitise everything, or all at once. Partial annuitisation is normal, and rates improve with age — some people buy in slices at 65, 70 and 75 (“laddering”), keeping the rest invested and getting better pricing on each tranche as they age.
• Inheritance tax. From 6 April 2027 unused pension pots count in your estate — but income you’ve converted to an annuity isn’t a pot any more. Annuitising removes that money from the estate calculation while solving longevity risk in the same stroke; the pensions and inheritance tax guide covers where this fits.
• Safety. Annuities are insurance contracts, protected by the FSCS at 100% with no upper limit if the insurer fails — stronger protection than the £85,000 limit on cash. A guaranteed income backed by a UK-regulated insurer is about as safe as private-sector promises get.

The floor-and-upside blend

The strongest retirement income plans usually aren’t “annuity vs drawdown” but both, in layers:

1. Add up your essential spending — housing, food, energy, insurance. The bills that must be paid in any market.
2. Cover it with guaranteed income: State Pension (topped up via NI gaps if needed) plus an annuity slice sized to fill the remainder. Now the worst market crash in history cannot touch your groceries.
3. Keep the rest in drawdown for flexible, growth-seeking spending — holidays, gifts, the fun layer — following the drawdown guide’s rules. With essentials floored, you can hold more equities and skip withdrawals in bad years without hardship.

This removes the single scariest retirement risk — outliving your money — while keeping most of the upside and flexibility. It also simplifies later life: a guaranteed income that just arrives every month is worth a lot at 85, when managing a portfolio (or having a partner suddenly have to) is a genuine burden.

The one-line summary

An annuity converts pension capital into income that cannot run out: decide single vs joint life and level vs escalating deliberately, always disclose health conditions (bad health means a bigger income), never accept your provider’s first quote without shopping the open market, and consider annuitising just enough — alongside the State Pension — to floor your essential spending, with drawdown on top for everything else.

Related guides & tools

• Retirement drawdown — the flexible layer that sits on top of the annuity floor
• Pensions and inheritance tax — why annuitised income sits outside the April 2027 estate change
• State Pension and your NI record — the first, cheapest slice of guaranteed income
• SIPPs and consolidating old pensions — check for guaranteed annuity rates before moving anything
• Pension tax relief — the MPAA and allowances that shape part-time retirement
• Financial Planner — model how an annuity floor changes what the rest of the pot must do

Last reviewed: August 2026.