CEO, The Savvy Investor Limited · Investment Educator
Updated: 13 June 2026 · Reading time: 9 minutes
⚠️ Important: This article provides educational information for UK residents and is not personalised financial advice. Buying an annuity is usually irreversible. Annuity rates change daily with gilt yields, and your own quote depends on age, health, and options chosen. Shop the whole market and consider regulated advice (or free Pension Wise guidance) before you buy.
For most of the 2010s, annuities were the unloved corner of retirement planning. Rock-bottom interest rates made them poor value, the 2015 pension freedoms let people keep their pots invested instead, and “annuity” became almost a dirty word. That has changed. Higher interest rates have pushed annuity rates to roughly 18-year highs, and a healthy 65-year-old can now convert a £100,000 pension pot into around £7,800 of guaranteed, lifelong income. The question retirees are asking again is a fair one: are annuities finally worth it?
The short version
- An annuity converts a pension pot into a guaranteed income for life (or a fixed term).
- Rates are near 18-year highs: the best single-life level annuity for a healthy 65-year-old is around 7.8%, roughly £7,800 a year per £100,000.
- Key choices: level vs inflation-linked, single vs joint life, and guarantee periods. Each changes the starting income.
- Enhanced annuities pay more if you have health or lifestyle conditions, and around half of people qualify for some uplift.
- The big decision is annuity vs drawdown: certainty versus flexibility. Many people now do both.
- You can still take 25% of your pension tax-free first; annuity income is then taxed as normal income.
- From April 2027, unused pension pots fall into your estate for inheritance tax, which subtly strengthens the case for converting some pot into income.
What an annuity actually is
You hand an insurer a lump sum from your pension, and in return they pay you a set income, either for the rest of your life or for a fixed period. The appeal is certainty: the income arrives whatever happens to markets, and a lifetime annuity cannot run out, however long you live. That removes the two biggest fears in retirement, investment risk and longevity risk, in one move.
The trade-off is flexibility and inheritance. Once bought, a standard annuity cannot be changed, and a basic single-life annuity stops paying when you die, leaving nothing behind unless you added options to protect against that.
The choices that shape your income
| Option | What it does | Effect on starting income |
|---|---|---|
| Level | Income stays the same for life | Highest at the start, but inflation erodes it |
| RPI / escalating | Income rises each year with inflation or a fixed % | Lower at the start, protects buying power |
| Single life | Pays only while you live | Higher income |
| Joint life | Continues to a spouse after death (often 50% or 100%) | Lower income, protects your partner |
| Guarantee period | Pays for a minimum term (e.g. 5 or 10 years) even if you die | Slightly lower income |
| Enhanced / impaired | Higher income for health or lifestyle conditions | Can be significantly higher |
The most common mistake is buying a level, single-life annuity purely because it shows the biggest headline number, without considering inflation or a surviving spouse. Over a 25-year retirement, inflation can roughly halve the buying power of a level income, and a single-life annuity leaves a widow or widower with nothing.
Always disclose your health
Unlike most insurance, with annuities poorer health is rewarded with a higher income, because the insurer expects to pay for fewer years. Smoking, high blood pressure, diabetes, a high BMI, or a history of serious illness can all lift your rate, sometimes substantially. Around half of buyers qualify for some enhancement, yet many never disclose, leaving income on the table. Always complete the health and lifestyle questionnaire honestly and in full.
Annuity vs drawdown: the real decision
The genuine choice at retirement is not really “annuity or not,” it is annuity versus drawdown (keeping your pot invested and drawing from it).
| Annuity | Drawdown | |
|---|---|---|
| Income certainty | Guaranteed for life | Depends on markets and withdrawals |
| Flexibility | None once bought | Full control |
| Longevity risk | Insurer carries it | You carry it (pot can run dry) |
| Inheritance | Usually nothing (unless joint/guarantee) | Remaining pot can pass on |
| Investment risk | None | Yours |
💡 The hybrid most planners favour
You do not have to choose all-or-nothing. A common, sensible approach is to annuitise enough to cover your essential bills (so the lights stay on no matter what markets do), and keep the rest in drawdown for flexibility, growth, and inheritance. With rates at current levels, securing your “income floor” with an annuity is more attractive than it has been in years.
How inheritance tax changes the picture from 2027
From 6 April 2027, most unused defined contribution pension pots will count towards your estate for inheritance tax. That weakens the old “leave the pension untouched to pass on tax-free” strategy and subtly strengthens the case for turning some of the pot into income you actually use. It is one more reason to revisit the annuity question now rather than assume drawdown is automatically better. Our pension IHT guide covers the change in detail.
How to buy well
- Take your 25% tax-free cash first if you want it; you annuitise the rest.
- Shop the whole market (the “open market option”). Never just accept your existing pension provider’s quote, which is often not the best.
- Disclose all health and lifestyle details to unlock enhanced rates.
- Decide on inflation protection and a spouse’s pension before chasing the highest headline figure.
- Use Pension Wise (free government guidance) or a regulated adviser. This is usually a one-way door.
Frequently asked questions
What income would £100,000 buy in 2026?
For a healthy 65-year-old, a single-life level annuity is paying roughly £7,250 to £7,800 a year per £100,000 at current rates, among the best in nearly two decades. Choosing inflation protection or a joint-life option lowers the starting figure, and health enhancements can raise it. Always get live quotes, as rates move with gilt yields.
Can I cash in an annuity if I change my mind?
Generally no. Beyond a short cooling-off period after purchase, a lifetime annuity is permanent. This is exactly why the decision deserves care, and why many people annuitise only part of their pot.
Is annuity income taxed?
Yes. After your tax-free lump sum, annuity income is taxed as ordinary income through PAYE, the same as a salary or other pension income.
Should I wait for rates to rise further?
Trying to time annuity rates is as hard as timing markets. Rates could rise or fall with gilt yields. Many people stagger their purchase, annuitising in tranches over several years, which spreads the timing risk and also reflects that rates tend to improve with age anyway.
Still building the pot?
Get the accumulation right first, then think about turning it into income.