What an annuity does

An annuity converts some or all of your pension pot into a guaranteed income for the rest of your life (or a fixed term, if you choose one), paid by an insurance company. Once bought, it typically can't be changed or cashed in — you're trading a lump sum for certainty.

What sets the rate

Annuity rates depend on your age, health, lifestyle (smokers and those with certain health conditions can get higher rates, since annuity providers expect to pay out for less time), interest rates generally, and the type of annuity chosen. Rates move with broader interest rates in the economy, so the same pot can buy a noticeably different income depending on when you buy.

Types of annuity

  • Level annuity: pays the same amount every year — starts higher than an escalating annuity but loses purchasing power to inflation over time.
  • Escalating annuity: increases each year (a fixed percentage, or tracking inflation) — starts lower but protects against rising prices over time.
  • Single life vs joint life: a joint life annuity continues (often at a reduced rate) to a spouse or partner after your death; single life stops when you die.
  • Enhanced annuity: pays a higher rate if you have a health condition or lifestyle factor that's likely to shorten life expectancy — always worth disclosing relevant health information, since it can meaningfully increase your income.

Shopping around matters

Annuity rates vary meaningfully between providers for an identical pot and personal circumstances. You're not obliged to buy an annuity from your existing pension provider — using the "open market option" to compare across the whole market, ideally with independent advice, can make a real difference to lifetime income.

Is it right for you?

Annuities suit people who value certainty over flexibility, particularly for covering essential living costs, or who are uncomfortable managing ongoing investment risk in retirement. They suit people less well if they want to leave money to family, retain flexibility, or believe they can achieve better returns by staying invested and using drawdown instead.

Key takeaways

  • An annuity trades a pension pot for a guaranteed income, usually for life.
  • Rates depend on age, health, and prevailing interest rates — always disclose health conditions.
  • Shopping around across providers can significantly change the income you get.
  • Annuities suit a need for certainty over flexibility or growth potential.