There are two main options at retirement for those with ‘defined contribution’ pension plans such as personal pensions and SIPPs. Continue investing and take out money from your pot as and when needed – known as drawdown – or buy an annuity.
What is an annuity?
An annuity is a product provided by an insurance company that will pay you an income, usually for life, in exchange for your pension pot or part of it. They come in various forms so they can be tailored to suit someone’s circumstances and objectives. But the important principle is that with a lifetime annuity the income is guaranteed for as long as you live, so they can essentially insure you against outliving your resources in old age.
How does an annuity work?
Once you reach minimum retirement age you can start drawing on a personal pension pot. You can dip in to take sums of money while keeping the fund invested – known as drawdown – or you can ‘buy’ a guaranteed income with some or all of it. Or a bit of both.
With an annuity you can, for instance, opt for payments to increase in line with inflation or a fixed amount (an escalating annuity), or you can choose to have a reduced income paid to a surviving spouse or civil partner on your death (joint life annuities). Both of these options will come at a cost of a lower starting income than standard level annuities based on a single life.
There are also ‘fixed term’ annuities that provide you with a guaranteed income for a set number of years with an option to receive money back at the end of the term, though these tend to be niche products and it is far more common to buy a lifetime annuity.
Drawdown vs annuity: which is better for you?
Deciding between a pension annuity and pension drawdown is a complex issue, and any decision must be carefully considered. Once you have bought an annuity you can’t reverse the decision and, in the case of standard products, you lose access to all your capital.
Meanwhile, drawdown offers extra flexibility and the potential for better returns and more income, but it is also more risky. Keeping your pension fund invested means the value can fluctuate according to what markets are doing. You also need to be careful about how much you take out and when to ensure you leave enough for future needs.
If you rely on drawdown to fund your retirement you risk running out of money if you live longer than expected, or a market fall hits the value of your pension pot. Follow the link to calculate how long your pension drawdown could last.
An annuity comes with the security that you won’t outlive it. Having at least some of your income guaranteed either with an annuity, or a protected income from another source such as a defined benefit pension scheme, can help ensure you can meet bills and basic needs for the rest of your life. This peace of mind means annuities can play a very useful role in retirement planning.
A perennial bugbear concerning annuities was the meagre income provided for the cash stumped up. This was largely a function of very low interest rates for much of the past decade, as well as increasing longevity. However, today’s market looks more attractive, and annuities have increased in popularity. Higher interest rates, which have been a real headache for mortgage holders and other borrowers, are a boost for those wishing to secure income from an annuity. It’s a potential silver lining for some at a time when many are feeling the squeeze from the rising cost of living.
Whether you opt for drawdown or annuity, or a mix of the two, you will have the ability to take a tax-free cash lump sum from your pension pot, which is usually a maximum of 25% of the value.
Are annuity rates going up?
Annuity rates are largely based on gilt (UK government bond) yields, which have risen sharply in recent years due to rising inflation, higher interest rates and, increasingly, concerns around the stability of government finances. The Bank of England (BoE) started to reduce rates in autumn 2024 as inflation was expected to fall back into line, but they stand much higher than pre-COVID lows, and its battle with price rises is far from over. The conflict in the Gulf has caused energy prices to surge and there are knock on consequences for food prices and all manner of goods and services.
We could, therefore, see these higher annuity rates in the UK for some time, though they could fall back if inflation and interest rates subside more than anticipated. In any case, if you’re retiring soon, you might get an attractive quote with rates higher than they have been for much of the past decade.
How much annuity does £100k buy?
Here are some current indicative annual income rates from June 2026 for a 65-year old using £100,000 to buy a lifetime annuity from their pension pot:
| £100,000 | Level | Inflation Linked (RPI) |
| Sole annuity (0% spousal, no guarantee) | £7,749 | £5,250 |
| 0% spousal annuity, 5-year guarantee | £7,710 | £5,236 |
| 50% spousal annuity, no guarantee | £7,317 | £4,842 |
| 50% spousal annuity, 5-year guarantee | £7,306 | £4,836 |
Source: Moneyhelper, June 2026
Are annuities worth it?
A retirement annuity can be an important tool for many people because they provide a guaranteed income for the rest of your life – no matter how long that turns out to be. However, they are inflexible. Once you have bought one you are locked into the specified terms once the cancellation period has ended. It is therefore important to fully consider the pros and cons, as well as the types of annuity that best meets your needs.
You don’t have to use your whole pension at once, so one way to combat the issue of inflexibility is to split your pension pot up and annuitise in tranches. If you are concerned rates could increase in the future, or if you want to build up your guaranteed income as your needs increase, you can do so. In the meantime, you stand to benefit from growing your pension pot by remaining invested, though that’s not guaranteed and your investments could fall in value.
Remember too that age plays a factor in your annuity income – the older you are, the better the annuity rate – all else being equal. You may prefer to use drawdown to begin with and buy an annuity later on to secure a higher amount of guaranteed income in later life. It is also worth noting that annuity income is taxable, so it may affect any potential income tax bill in the current tax year or future ones, and it can affect any means tested benefits.
How can I get the best annuity rates for me?
When buying an annuity the wrong decision could end up being costly. It could be one of the largest and most important purchases you ever make, so don’t just accept the annuity rate offered to you by your existing pension provider. Shopping around for the best annuity rates can improve the level of income you receive by 10% or more.
It’s also important to include health and lifestyle details when getting annuity quotes. ‘Enhanced’ annuities offer higher income if you have a health condition or if you smoke. This can be another reason why delaying some or all of your annuity purchase can make sense. If you develop a health condition in later life then it will increase the uplift in rates available based on age alone. Finally, do bear in mind that some older pensions offer guaranteed annuity rates that may be significantly higher than those available on today’s open annuity market.
If you’re unsure, you can learn more about the pros and cons of different annuity options, as well as your broader retirement income, from the government’s Pensionwise service. Our Financial Coaches can also discuss your situation and help you understand your options with a view to maximising the annuity rate you can get if appropriate.
What happens to an annuity when I die?
This depends on the terms of your chosen annuity. Unless an income payment guarantee period, for instance for a minimum of five or ten years, or a spouse’s pension is built in, income from a lifetime annuity ceases on death.
These extra features are decided at outset and specified in the annuity quotes you receive if you choose to include them. The greater the income guarantees and death benefits, and the larger the spouse’s pension you include, the less annual income you will tend to be offered.
With a fixed term annuity, you receive a guaranteed income for a set number of years with an option to get money back at the end of the term.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
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