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If you’re approaching retirement and someone has mentioned “buying an annuity” with your pension pot, you’ve probably felt a flicker of panic. It sounds like a big, permanent decision — because it usually is. You hand over a lump sum, and in return you get an income for the rest of your life. No more managing investments, no more wondering if your money will run out. But also no more flexibility, and no way to change your mind once it’s done.
This is one of the most consequential choices you’ll make with your pension, and most people make it without really understanding what they’re buying or whether it suits their situation. That’s not your fault — annuities aren’t explained well, and the market has shrunk since pension freedoms arrived in 2015, so fewer people know anyone who’s actually bought one.
This article explains what an annuity actually is, how the numbers work, what the real trade-offs are, and the situations where it genuinely makes sense — and where it doesn’t.
What an annuity actually is
An annuity is a financial product you buy with some or all of your pension pot (usually a defined contribution pension — the type where you’ve built up a pot of money, not a final salary scheme). In exchange for your lump sum, an insurance company pays you a guaranteed income, either for the rest of your life or for a fixed number of years.
Think of it like the reverse of a mortgage. Instead of borrowing money and paying it back with interest, you’re handing over a pot of money and getting paid back, bit by bit, until you die.
Once you buy it, it’s generally irreversible. You can’t get the lump sum back, and in most cases you can’t change the terms. That permanence is the whole point — and also the biggest risk.
How the income is actually calculated
The income you get depends on four main things:
- The size of your pot. Bigger pot, bigger income — obviously, but worth saying plainly.
- Your age. The older you are when you buy it, the higher the income, because the insurer expects to pay it out for fewer years.
- Annuity rates at the time. These move with interest rates and bond yields. When rates are higher (as they have been since 2022), annuity rates tend to be better than they were in the low-rate years of the 2010s.
- Your health and lifestyle. This surprises a lot of people. If you smoke, have a health condition, or are overweight, you may qualify for an “enhanced” or “impaired life” annuity that pays more, because the insurer expects to pay out for less time.
A 65-year-old in 2026 buying a standard annuity might get somewhere in the region of 6-7% of their pot per year as income, though this varies by provider, the options you choose, and market conditions at the time. That’s a rough guide, not a quote — rates change constantly, which is why it’s worth getting an up-to-date comparison at the point you’re actually buying, rather than relying on anything you read months earlier.
The decision that changes everything: single life vs joint life
This is where a lot of people get caught out. A single life annuity pays income only for your lifetime — when you die, it stops, even if that’s a month after you bought it. A joint life annuity continues paying (usually at a reduced rate, like 50% or 66%) to your spouse or partner after you die.
Single life pays more per year. Joint life pays less, but protects your partner from suddenly losing that income. If you’re married or in a long-term partnership and they rely on your pension income, choosing single life purely because the monthly number looks bigger can leave them in real financial trouble later. This is one of the most common regrets people have after buying an annuity — and because it can’t be undone, it’s worth slowing down on this specific choice.
The misconception: “annuities are a bad deal”
Since pension freedoms gave people the option to leave their pot invested and draw it down flexibly (known as drawdown), annuities got a reputation as the outdated, poor-value option. That reputation isn’t entirely fair.
Annuities aren’t bad value — they’re a trade. You’re paying for certainty. With drawdown, your pot stays invested, which means it can grow, but it can also fall, and you carry the risk of running out of money if you live longer than expected or markets perform badly at the wrong time. With an annuity, the insurance company carries that risk instead of you. That’s genuinely valuable for some people, especially those who find managing investments stressful or who don’t have other guaranteed income to fall back on.
The honest answer is that annuities became less popular, not necessarily worse. They also became more attractive again as rates rose from 2022 onwards — something worth knowing if you last looked at annuities years ago and wrote them off.
Annuity vs drawdown vs a mix: how to think about it
| Factor | Annuity | Drawdown |
|---|---|---|
| Income certainty | Guaranteed for life (or chosen term) | Varies, depends on investment performance |
| Flexibility | None — fixed once bought | High — withdraw what you need, when |
| Risk of running out of money | Carried by the insurer | Carried by you |
| Can you leave money to family? | Only with certain options (e.g. guarantee periods) | Yes, remaining pot can be inherited |
| Protection against inflation | Only if you buy an inflation-linked annuity (lower starting income) | Depends on investment growth |
| Best suited to | Those wanting certainty, no other guaranteed income, or who don’t want to manage investments | Those with other income sources, comfortable with risk, wanting flexibility |
Many people don’t have to pick one or the other. A common approach is to use part of your pot to buy an annuity that covers your essential bills — rent or mortgage, utilities, food — and leave the rest invested in drawdown for flexibility and growth potential. That way your basic needs are guaranteed, and you still have room to adapt.
The options that change your payout (and why they matter)
When you buy an annuity, you’ll be offered add-ons. Each one reduces your starting income in exchange for protection against a specific risk:
- Inflation-linking (escalating annuity): Your income rises each year, usually in line with inflation or a fixed percentage. Starting income is lower, but it protects your buying power over a 20–30 year retirement.
- Guarantee period: If you die within a set number of years (e.g. 5 or 10), payments continue to your estate for the rest of that period. Useful if you’re worried about dying soon after buying it.
- Value protection: Returns some of your original pot to your beneficiaries if you die before receiving its full value back.
Each option costs you income now in exchange for protection later. There’s no right answer — it depends on your health, your family situation, and how much you value certainty over a higher starting number.
Should you get financial advice before buying one?
If your total pension pot is large, or you’re considering an annuity alongside other pensions, savings, or a final salary scheme, this is genuinely complex territory, and the decision is permanent. A regulated financial adviser can model your specific numbers against your situation in a way a general article can’t.
If you don’t want to pay for full advice, MoneyHelper offers a free, impartial Pension Wise appointment for anyone over 50 with a defined contribution pension — it won’t tell you what to buy, but it will walk through your options so you go into the decision informed rather than guessing.
The bottom line
- Shop around before you buy — don’t take the first offer from your existing pension provider. Annuity rates vary significantly between insurers for the exact same pot and age, and you’re not obliged to buy from whoever you already save with.
- If you have a partner who depends on your income, think hard before choosing single life purely because the number looks bigger. Once bought, it can’t be reversed.
- Mention any health conditions or lifestyle factors when you get quotes. You could qualify for a higher income through an enhanced annuity, and many people never ask.
- Consider splitting your pot rather than treating it as all-or-nothing. An annuity for essentials and drawdown for the rest gives you certainty and flexibility, rather than betting everything on one approach.
- Book a free Pension Wise appointment through MoneyHelper before you decide anything. It’s free, impartial, and designed specifically for this decision — there’s no good reason to skip it.
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