What Is an Annuity?
An annuity is the traditional way to convert a pension pot into retirement income. You give your pension pot (or part of it) to an insurance company, and in return, they guarantee to pay you a regular income for the rest of your life — no matter how long you live.
After falling out of favour during the low interest rate era, annuities have made a strong comeback thanks to significantly higher rates since 2022.
Types of Annuity
| Type | Description | Best For |
|---|---|---|
| Level annuity | Fixed income that never changes | Highest initial income; those with other inflation-linked income |
| Escalating annuity | Income increases by a fixed % each year (e.g., 3%) | Protection against inflation; those expecting long retirement |
| RPI/CPI-linked annuity | Income increases in line with inflation | Best inflation protection but lowest starting income |
| Joint-life annuity | Continues paying to surviving partner on death | Couples wanting guaranteed income for both lives |
| Enhanced annuity | Higher income for those with health conditions | Anyone with health issues or lifestyle factors |
| Investment-linked annuity | Income varies with investment performance | Those wanting some investment exposure with guarantees |
Current Annuity Rates (2026)
Annuity rates depend on your age, health, pot size, and annuity type. Indicative rates for a level, single-life annuity with no guarantee period:
| Age | £100,000 Pot | £200,000 Pot | £300,000 Pot |
|---|---|---|---|
| 55 | ~£5,200/year | ~£10,500/year | ~£15,900/year |
| 60 | ~£5,900/year | ~£11,900/year | ~£18,000/year |
| 65 | ~£6,800/year | ~£13,700/year | ~£20,700/year |
| 70 | ~£7,800/year | ~£15,800/year | ~£23,800/year |
| 75 | ~£9,200/year | ~£18,500/year | ~£27,900/year |
Rates are indicative and vary by provider. Enhanced annuities for health conditions can be 10-40% higher.
Shopping Around: The Open Market Option
You are not obliged to buy an annuity from your current pension provider. Shopping around is essential — the difference between the worst and best annuity rates can be 15-20%.
Enhanced Annuities: Higher Income for Health Conditions
If you have any health conditions, you may qualify for an enhanced annuity that pays more than a standard rate. Qualifying conditions include:
- Diabetes, heart conditions, high blood pressure, cancer
- Obesity (BMI above 30), high cholesterol
- Smoking (current or recent), heavy alcohol consumption
- Mobility issues, respiratory conditions (COPD, asthma)
Annuity Features to Consider
- Guarantee period — payments continue to beneficiaries for a set period (5 or 10 years) even if you die sooner
- Value protection — returns the remaining pot value (minus income paid) as a lump sum on death
- Joint-life — income continues (usually at 50-66%) to your surviving partner
- Escalation — income increases each year to protect against inflation
- Proportion — the percentage of income paid to a surviving partner
Annuity vs Drawdown: When Each Makes Sense
| Choose Annuity If... | Choose Drawdown If... |
|---|---|
| You want guaranteed income for life | You want flexibility in withdrawals |
| You are worried about running out of money | You are comfortable with investment risk |
| You have limited other income sources | You have other guaranteed income (State Pension, DB pension) |
| You do not want to manage investments | You want to control your investments |
| You have health conditions (enhanced rates) | You want to leave money to beneficiaries |
The Blended Approach
Many financial advisers recommend a blended approach: use an annuity to cover essential fixed costs (bills, food, housing) and drawdown for discretionary spending (holidays, leisure, gifting). This provides security for necessities while maintaining flexibility for extras.
Next Steps
If you are considering an annuity, get quotes from multiple providers. Declare all health conditions. Consider using an annuity broker who can search the whole market for you. And think about whether a blended approach with drawdown might give you the best of both worlds.