Are annuities worth another look?
For a long time, annuities fell out of favour with many people approaching retirement.
Pension freedoms gave people much greater flexibility over how they used their retirement savings, while years of low interest rates made annuity rates relatively unattractive.
But things have changed.
Annuity rates have improved considerably, and changes to the Inheritance Tax treatment of pensions from April 2027 may also affect the way some people think about their retirement income.
So, if you dismissed annuities a few years ago, could they now be worth another look?
And importantly, the choice doesn’t necessarily have to be annuity or pension drawdown. For some people, using a combination of the two could provide a useful balance between certainty and flexibility.
What does an annuity actually do?
In simple terms, you use some or all of your pension fund to buy a guaranteed income, usually for the rest of your life.
The attraction is certainty. You know what income you will receive, regardless of how long you live or what happens to investment markets.
The trade-off is flexibility. Once an annuity has been purchased and the cancellation period has expired, the decision is normally irreversible. You no longer have access to the capital used to buy it.
That fundamental difference is useful when comparing an annuity with pension drawdown.
With drawdown, your pension remains invested. You decide how much to withdraw and when, and the remaining fund has the potential to grow. However, you also retain the investment risk and the risk of withdrawing too much too soon.
With an annuity, the insurer takes on much of that investment and longevity risk in return for the capital used to purchase it.
What might £100,000 provide?
Annuity rates depend on your age, health, lifestyle and the options you choose, and rates can change frequently.
However, to give an indication, Hargreaves Lansdown’s published best-buy comparison on 17th September 2026 showed that £100,000 for a healthy 70-year-old could provide approximately:
- £8,908 a year for a single-life, level annuity with no guarantee
- £8,228 a year for a level annuity continuing at 50% to a spouse
- £6,230 a year for a joint-life annuity, continuing at 50% to a spouse, increasing by 3% each year, and with no guarantee period.
These are illustrations rather than personalised quotations, but they demonstrate an important point: the choices you make about the income can make a considerable difference to the amount you receive.
You can tailor the income
Annuities aren’t all the same.
You can choose an income for your life only or arrange for some or all of it to continue to a spouse or other nominated beneficiary after your death.
You can also consider a guarantee period, which may allow payments to continue for a specified period if you die relatively soon after purchasing the annuity.
And you can choose between a level income or one designed to increase over time to provide some protection against inflation.
Each additional protection generally comes at a price: the greater the guarantees and benefits you include, the lower your starting income is likely to be.
Health can work in the opposite direction. Certain medical conditions or lifestyle factors may qualify you for an enhanced annuity and a higher income.
This is one reason why shopping around rather than simply accepting an existing pension provider’s offer can be important.
Could an annuity cover the bills?
Perhaps the more useful question isn’t whether you should put your entire pension into an annuity or leave all of it invested.
Consider a household that needs £35,000 a year to meet its essential expenditure.
State Pension, defined benefit pensions and other guaranteed income provide £25,000, leaving a £10,000 gap.
One option could be to use part of the pension fund to purchase enough guaranteed income to cover that £10,000.
The household would then know that its essential expenditure was covered for life, without depending on investment performance.
The rest of the pension could remain invested in drawdown and be used for more flexible expenditure such as holidays, home improvements, cars or gifts to family.
This approach can provide some of the certainty of an annuity without giving up all the flexibility and investment potential of drawdown.
Why might certainty become more attractive later in retirement?
Managing a pension portfolio and deciding how much you can safely withdraw may be perfectly manageable at 60 or 65.
Some people may feel differently at 80 or 85.
An annuity can remove some of those decisions. It can also remove the worry that a period of poor investment returns, combined with withdrawals, could reduce the sustainability of the pension fund.
This doesn’t necessarily mean buying an annuity as soon as you retire. Some people may choose to remain in drawdown initially and consider annuitising part of their pension later.
What about passing your pension on?
This is another area that deserves attention.
Historically, one attraction of retaining money within a pension has been its favourable treatment for Inheritance Tax purposes.
From 6 April 2027, most unused pension funds and pension death benefits are due to be brought within the deceased member’s estate for Inheritance Tax purposes.
That could change the calculations for some people who have retained substantial sums within pension drawdown partly for estate-planning reasons.
The rules around annuities are different and depend on the type of annuity and death benefits selected. For example, the treatment of a qualifying joint-life annuity continuing to a surviving spouse is different from money remaining under certain guarantee periods.
This is a complex area where individual circumstances matter, so tax and estate planning should form part of the wider retirement-income discussion rather than being considered in isolation.
So, annuity or drawdown?
There isn’t a universal answer.
Drawdown offers flexibility, access to capital and the potential for continued investment growth. An annuity offers something quite different: certainty of income for life.
For some people, one will clearly be more appropriate than the other.
For others, the interesting question may be how the two could work together.
Using guaranteed income to help cover essential expenditure while retaining some pension savings in drawdown for flexibility could provide a useful middle ground.
If you haven’t considered an annuity for several years, the combination of improved rates and changing pension rules means it may be worth revisiting the conversation with your financial adviser.
Annuity rates change frequently and depend on individual circumstances, health, postcode and the options selected. Pension, tax and Inheritance Tax rules can also change. This article is for general information only and does not constitute personalised financial or tax advice.
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