Retirement annuities: why guaranteed income deserves another look

A £100,000 pension pot can now buy a healthy 65-year-old more than £8,000 a year, guaranteed for life. In 2021 the same pot bought around £4,000.

That is the biggest change in retirement planning in the last five years, and most people have not noticed it.

Why is this important when it comes to retirement planning?

It matters because the decision at retirement is no longer simply about whether to leave a pension invested.

For the first time in years, guaranteed income can offer genuinely competitive value, particularly for people who want to remove some uncertainty from later life.

What happened with annuities?

Annuities went out of fashion in 2015. Pension freedoms arrived, rates were at historic lows, and drawdown gave people flexibility, growth, and something to pass on.

For ten years, locking money into a fixed income looked like a poor decision.

Many retirees therefore became accustomed to thinking of annuities as an outdated product rather than one option within a wider retirement plan.

How have annuities changed?

Two things have changed since. Interest rates went up and took annuity rates with them.

And from April 2027, pensions come into the inheritance tax net, which removes one of the main reasons for leaving a pot untouched.

Together, those changes mean it is worth reassessing assumptions that may have been perfectly sensible only a few years ago. But what does this mean in practice?

What is an annuity?

An annuity is a simple deal with an insurance company. You hand over a lump sum from your pension. They pay you a fixed income for the rest of your life, however long that turns out to be.

It is the only retirement product that removes two risks completely: markets falling and running out of money because you lived longer than expected.

Those risks can become more important as retirement progresses. Someone in their sixties may be comfortable managing investments and absorbing short term volatility, while the same person may place a much higher value on certainty at 75 or 80.

The income does not depend on investment performance. The insurer pools thousands of customers together, and those who die earlier effectively fund those who live longer. That is what makes the guarantee possible. In practical terms, you exchange access to a portion of your capital for certainty over the income that capital will produce.

What does taking an annuity mean for my pension?

You can still take up to 25% of the pot as tax-free cash first. You do not have to annuitise everything, and most people should not.

The income is taxed as earned income, like a salary or the State Pension. You can also use different parts of the pension at different times, which means annuitisation does not need to be one large decision made on a single day.

What decides how much I will get from an annuity?

Annuity rates follow long-term gilt yields, not the Bank of England base rate directly. Insurers buy government bonds to back the income they promise.

When gilt yields rise, the income they can afford to pay rises with them. Yields moved sharply in 2022 and have stayed high, even as the base rate has started to come down.

The figures as of 19 October 2026, from the Money Helper tables reported by consumer magazine Which?:

• Healthy 65-year-old, £100,000, single life, level income: up to £8,237 a year
• The same person at 70: up to £9,094 a year
• Lowest quote in the same table at 65: £6,703 a year

That last line is important.

The gap between the best and worst provider is around £1,500 a year, for life.

Over a retirement lasting 20 years, that could amount to tens of thousands of pounds of additional income.

You should never accept the rate your existing pension provider offers without checking the rest of the market.

Could annuity rates rise further?

Nobody knows whether rates have peaked.

If gilt yields fall, so does the income on offer.

Equally, delaying getting an annuity purely in the hope of a better rate has a cost because you give up income in the meantime.

The decision is therefore about your circumstances and objectives rather than trying to predict the perfect moment in the market.

What types of annuity can you get?

The headline rate is for the simplest version: one life, level income, nothing protected.

Every feature you add to the annuity reduces the starting income. The question is what you are prepared to pay for, and which risks matter most to you.

Here are some of the key types of annuity available:

Level income vs escalating income

A level income never changes over time, so inflation eats into it. An income rising by 3% a year starts at roughly £5,700 instead of £8,200 based on a £100,000 annuity taken out at age 65 and can take over a decade to catch up.

The right choice depends partly on what other inflation-linked income you already have. Someone with a substantial State Pension or final salary pension may be more comfortable taking a level annuity than someone whose guaranteed income is otherwise limited.

Single life vs joint life

A joint-life annuity keeps paying a share – usually 50% or two-thirds – to your spouse or partner after you die. For a couple of the same age, 50% costs around £400 a year on £100,000.

That reduction in starting income can be worthwhile where one partner would otherwise face a significant drop in household income after the other’s death.

Guarantee period vs value protection

Take out a guaranteed period annuity and payments continue for a set period, often 5 or 10 years, even if you die early.

Alternatively, some annuities include a lump sum equal to the purchase price less income already paid going to your beneficiaries after your death.

Both of these can provide peace of mind for people who dislike the idea of paying a substantial sum to an insurer and dying shortly afterwards.

Enhanced rates

If you smoke, are overweight, or take medication for blood pressure or cholesterol, insurers may pay more because they expect to pay for less time.

Consumer magazine Which? found uplifts of 6% to 15% for an ordinary health profile.

When you fill in a health form for an annuity, you should ensure that you disclose everything since medical history, medication, lifestyle and some occupations can all affect the rate which you get.

And if you started a pension in the 1980s or 1990s, check for a guaranteed annuity rate. Some are far above anything available on the open market today.

Should you buy an annuity or stick with draw-down to fund your retirement?

It is rarely one or the other. The strongest retirement plans I build use both.

Drawdown keeps the money invested and accessible. You decide how much to take and when, you can manage the tax, and whatever is left can go to your family.

The cost is that you carry the risk. A bad run of markets in the first few years, particularly while withdrawals are being made, can do lasting damage to a portfolio.

Simply living to 95 can also leave you short. It also means making investment decisions every year, at an age when many people would rather not.

An annuity passes those risks to the insurer. In return you give up flexibility and, usually, the capital. Also, once you have bought an annuity, it cannot be undone.

The approach that works for many people is to work out the income they cannot do without, including housing, food, utilities and insurance.

Cover that with the State Pension, any final salary pension, and potentially an annuity. With the essentials guaranteed, the rest can stay invested for growth and the things you want to do. A market fall then becomes an inconvenience rather than a threat to the household’s basic standard of living.

How annuities can bring peace of mind

There is also a psychological benefit that spreadsheets struggle to capture.

Knowing that essential bills are covered regardless of markets can make it easier to spend the rest of the retirement pot with confidence.

Some retirees underspend because they are worried about an uncertain future. A secure income floor can make the remaining capital feel genuinely available for holidays, family and enjoying retirement.

Buying in stages also works. A tranche at 65, another later in retirement when rates may be higher because of age. This keeps some flexibility while gradually increasing guaranteed income. It can also allow health changes to be reflected in future enhanced rates.

Why IHT changes are bringing annuities back into fashion

From 6 April 2027, unused pension funds and most pension death benefits are expected to count as part of your estate for inheritance tax.

For a decade, the pension was often the last asset you spent, precisely because it sat outside the estate. That is ending, which changes the order in which some families may want to use their assets.

Annuities in estate planning

What I am now seeing is annuities being considered deliberately as part of estate planning.

Clients may crystallise part of a pension and buy an annuity with it. That converts capital into lifetime income and removes a slice of market risk from the portfolio at the same time.

The income can then be spent or, where the relevant conditions are met, gifts made as part of normal expenditure from surplus income may fall outside the estate for inheritance tax purposes.

This is an area where individual circumstances and record keeping matter, so it should be considered alongside wider tax and estate planning rather than in isolation.

How are annuities treated under inheritance tax rules?

The rules on what is taxed are worth knowing, as Legal & General sets out:

• A single-life annuity leaves nothing to inherit, so there is nothing to tax
• Income continuing to a spouse or civil partner under a joint-life annuity is exempt
• Guarantee-period payments, value-protection lump sums, and fixed-term annuity balances paid to anyone else may fall into the estate

Income tax can apply as well, depending on the type of benefit and the age at death.

For someone already above the nil-rate bands, turning some pension capital into lifetime income and then spending or gifting appropriately may produce a better overall result than leaving the entire pension untouched.

For others, drawdown will still be preferable because flexibility, access to capital and potential investment growth matter more.

This is why getting professional financial advice which takes account of your individual financial circumstances is so important when considering an annuity.

Who is buying annuities?

The clients now choosing annuities fall into two broad camps, and they could not be more different.

The first are focused on tax efficiency and estate planning. They have seen the 2027 changes coming, run the numbers, and are considering an annuity to reduce exposure to an estate problem while keeping a guaranteed floor under their income.

For these people, the annuity is not a retreat from investing. It is one component of a more deliberate plan for how different assets will be used during retirement.

The second type of annuity buyers do not care primarily about tax at all. They want a retirement with fewer moving parts: fewer investment decisions, fewer reviews, and less paperwork. Some are willing to give up flexibility because knowing exactly what will arrive in the bank each month is more valuable to them than having a larger pot on a screen.

There is a third group worth mentioning: people already several years into drawdown.

They may have been comfortable taking investment risk at 60 or 65 but feel differently at 70 or 75. An annuity can become more attractive with age, both because rates generally improve and because certainty can become more valuable. Retirement planning does not have to remain fixed simply because a particular strategy was chosen on day one.

All these approaches can be legitimate, provided the choice is made knowingly. The right answer depends on what you value, not just what the spreadsheet says.

Things to remember when considering an annuity

An annuity is a one-off, irreversible decision. It rewards preparation.

Before asking for a single quote, be clear on four things:

1. How much guaranteed income you need
2. Whether a partner depends on it
3. What you want to happen when you die; and
4. Your full health and lifestyle picture

The last one alone can materially increase the income available.

It is important to remember that when it comes to choosing an annuity, you are never tied to the provider that holds your pension.

How a financial adviser can help

As independent financial advisers at Fairstone, we can help you compare the whole market, including enhanced terms, and model the annuity alongside drawdown and your other assets, so you see the trade-offs in your own figures.

The key is not to ask whether annuities are good or bad. The better question is how much certainty you want to buy, what you are willing to give up for it, and how that guaranteed income fits with the rest of your retirement plan.

If you are within five years of retirement, already in drawdown and uneasy about market risk, or reviewing your estate ahead of April 2027, this is the moment to look again.

Get in touch with one of our advisers to find out more.

Disclaimer: This article is for informational purposes only and does not constitute financial, tax, or legal advice. Tax treatment depends on individual circumstances and may change. A recommendation will be made only following a full assessment of your personal circumstances. Always seek professional advice before making financial decisions.