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Annuities haven’t been loved by Britons over the last decade, following the introduction of pension freedoms in 2015.
But recent data suggest they may be coming back into fashion. The total spent on turning pensions into annuities increased by 4 per cent to £7.4billion in 2025, according to the trade group, the Association of British Insurers (ABI).
This is despite actual sales of annuities decreasing slightly by 2 per cent in 2025, which implies that people are deciding to turn larger pension pots into annuities.
Annuities let those in retirement exchange their pension for a guaranteed income. They fell out of favour following 2015’s pensions overhaul, which allowed those reaching retirement to access their pot flexibly – negating the need to exchange it for guaranteed income.
The uptick in those taking out an annuity is down to higher annuity rates – which are linked to interest rates – and the fact that pensions will be subject to inheritance tax from April 2027. This means retirees may now be more willing to use up their pension pot rather than pass it on with a tax liability.
We explain what an annuity is and how it works, examine whether now is a good time to buy one, and compare the annuity rates that are currently available.
> We’ve partnered with Pense to help you find the best annuity deal*
Annuities allow you to turn your pension pot into a guaranteed retirement income
What is an annuity?
An annuity is a financial product that pays you a guaranteed retirement income in exchange for part or the entirety of your pension pot.
It’s a type of insurance rather than an investment. You’re protecting against the risk that you live long enough to run out of pension funds, with annuity income guaranteed for life or a set period.
Buying an annuity also means you don’t need to worry about investment performance. If your pension remains invested in the stock market, a market downturn can materially affect your wealth and lifestyle when drawing from your pot. Read more about self-invested personal pensions (Sipps).
The traditional downside to annuities has been that on death, the income stops and there’s no pension pot to pass on to family, unless you’ve chosen an option that protects the income or pension value.
But the fact that pensions will be subject to inheritance tax from April 2027 could make them worth another look. With a pension pot disappearing in return for the annuity, the value of the estate gets reduced – along with the tax liability.
How do annuities work?
Annuities can be straightforward, but there’s lots of choices to make when buying one.
The key feature is that they’re not flexible. Once you’ve bought the annuity and started receiving your payments, you can’t go back on your decision.
You must decide whether you want to exchange the whole or part of your pension pot for the annuity, plus whether you want an income for the rest of your life or for a set period.
The exact features and options available are usually dependent on your personal circumstances and life expectancy. It’s a good idea to speak to a financial adviser to help with retirement planning. We’ve partnered with Flying Colours* who can help you develop a tailored plan.
Otherwise, you can find a local financial planner using Unbiased*, a service that matches you to a professional based on your needs.
Here are the decisions you need to make, plus the different types of annuity available.
Do you want an income for life or a fixed period?
Annuities pay you a guaranteed income for life, or for a short or fixed-term period.
Lifetime annuity: Use all or part of your pension pot to secure a guaranteed income for the rest of your life. You agree on the amount and frequency of the payments upfront.
Short-term or fixed-term annuity: Less of a commitment than a lifetime annuity, these allow you to get a regular income for a set period, often between one and 40 years. They’re not always called annuities – you might see them referred to as guaranteed income plans.
At the end of a fixed-term annuity, you will usually be paid a maturity amount as a lump sum. You can then use this elsewhere, perhaps to buy another annuity or place it into a drawdown scheme.
Do you want your income to increase each year?
You can choose for your annuity income to stay the same each year, which is known as a level annuity. This doesn’t change in line with inflation, so the purchasing power of your income falls over time as prices rise.
On the other hand, an escalating annuity means your income will rise each year. You could choose it to increase by a set percentage each year, or have the rise linked to inflation.
The downside is that you’ll receive a smaller income initially, but your purchasing power won’t reduce over time.
Will you qualify for an enhanced annuity?
You may get a higher income if your health or lifestyle means that your life expectancy is shorter than average.
Examples include if you smoke, are overweight or have an existing medical condition.
It’s important to tell the annuity provider or your adviser about anything that may qualify you for an enhanced annuity. They should then work to get better rates for you. Pense, pension experts that we partner with, have an annuity calculator you can use to see the rates you might qualify for*.
Otherwise, a standard annuity means that your income is based on how long you can expect to live on average, where you live, and how much you have in your pension.
How frequently do you want your annuity income?
It’s possible to take your annuity income monthly, annually, or somewhere in between – for example, twice yearly or quarterly.
You can also choose for it to be paid in arrears or in advance. If it’s paid in arrears, you’ll receive it at the end of the period. For example, if you’re paid annually, you’ll get a payment a year after you buy the annuity.
This choice often means you’ll get higher rates, because the provider will leave the money invested for longer.
Income in advance means you’ll start receiving the income straight away.
How do you want the annuity to work after you die?
There are protections available when you set up the annuity that allow payments to be made to your beneficiaries after you die. Otherwise, payments stop on death and the pot that you used to buy the annuity disappears.
If you want these benefits, you can choose:
Value protection: This protects the pot you used to buy the annuity by paying out any difference between its value and the amount you received in income.
Guarantee period: This protects your annuity income by ensuring it’s paid for a set period, even if you die during that time.
Joint life annuity: Your annuity income will continue to be paid after you die to your beneficiary for the rest of their life. This will be your spouse, civil partner, or a chosen beneficiary – someone who is financially dependent on you.
How much does an annuity cost?
The cost of an annuity itself is essentially the size of the pension you’re using to buy one, with higher pots leading to an increased annuity income.
But your income depends on the annuity rate that you receive from the provider, which is usually seen as the cost of the product. Rates vary and are fixed for the whole of the annuity, so it’s important to compare your options by shopping around.
Annuity rates depend on a few factors like the size of your pot, your age, health, and where you live – they’re closely linked to interest rates too.
If you protect your pension – perhaps by ensuring that your beneficiaries will receive annuity income after your death – this will also lower the income rate you receive.
Keep in mind rates are calculated differently for lifetime annuities and fixed-term annuities.
Associated fees when buying an annuity include financial advice. A professional will help you decide whether an annuity is the right choice for you, considering all your options in retirement. You can use a service like Unbiased to find a local financial adviser.
There may also be fees for setting up and running the annuity, but they may be incorporated into the rate that you receive. Check the charging structure when taking out the product.
Where do annuity rates currently stand?
| 20 March 2026 | £3,558 |
| 3 March 2025 | £3,498 |
| Difference | £60 |
| Based on an annuitant aged 65 buying a single life level without guarantee annuity for a £50,000 purchase price. Source: Moneyfactscompare.co.uk | |
Annuity rates have been rising over the last couple of years, which is a boost for those in retirement looking for the certainty of a guaranteed income.
According to Standard Life, the pension provider, annuity rates continued an upward trend at the end of 2025. They reached 7.51 per cent for a healthy 65-year-old, increasing from 7.12 per cent in December 2024.
The provider says that someone retiring with a £100,000 pot could have an income of up to £7,510 a year, increasing from £7,120 a year before, equating to an additional £7,000 to £9,000 in expected total income.
Meanwhile, data from rates scrutineer Moneyfacts released in March 2026 suggests that annuity rates may be set to rise further in 2026 because of market unrest.
This is down to rising gilt yields affecting annuity rate pricing. Gilts are bonds issued by governments and they have been rising because of the continued conflict in the Middle East.
Moneyfacts says that the average annual annuity income for a 65-year-old with a £50,000 pot has gone up by £60 year-on-year on average. It’s sitting at £3,558 now, up from £3,498 in March last year.