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Annuities fell sharply out of favour with British retirees following the landmark pension freedoms introduced in 2015 — but a decade on, the tide may be turning.
New figures from the Association of British Insurers (ABI) show that the total amount channelled into annuities rose 4 per cent to £7.4 billion in 2025, even as the number of policies sold dipped slightly by 2 per cent. That apparent contradiction points to one clear trend: people are converting bigger pension pots into annuities than before.
Two forces are driving this shift. First, annuity rates have climbed in step with interest rates, making the income on offer more attractive than it has been for years. Second, the government's decision to bring unspent pensions within the scope of inheritance tax from April 2027 has changed the calculus for many savers. A pension pot that was once a tax-efficient legacy asset now carries a potential liability — which makes spending it on an annuity considerably more appealing.
Below, we explain how annuities work, assess whether now is a good time to buy, and set out the rates currently available.
> We've partnered with Pense to help you find the best annuity deal*
What is an annuity?
An annuity is a financial product that converts part or all of your pension pot into a guaranteed retirement income. It is better understood as a form of insurance than an investment: you are protecting yourself against the risk of outliving your savings, with income guaranteed for life or for a defined period.
Buying an annuity also removes exposure to investment volatility. If your pension remains in the stock market, a sustained downturn can seriously erode your wealth just as you are drawing on it. Read more about self-invested personal pensions (Sipps).
The traditional drawback has been inflexibility: once you hand over your pot, the income stops on death and there is nothing left to pass on — unless you have specifically arranged otherwise. That disadvantage looks somewhat different now that inherited pensions face inheritance tax from 2027. Converting a pension into an annuity reduces the size of your taxable estate, which could leave beneficiaries better off overall.
Key decisions when buying an annuity
Annuities are straightforward in principle, but they demand careful upfront choices. Crucially, once you start receiving payments, you cannot reverse the decision — so it is worth taking the time to get it right.
You will need to decide whether to convert your whole pot or only part of it, and whether you want income for life or for a fixed term. The options available to you will depend on your personal circumstances and life expectancy, which is why speaking to a financial adviser before committing is strongly recommended. We've partnered with Flying Colours*, who can help you build a tailored retirement plan. Alternatively, Unbiased* can match you with a local financial adviser based on your specific needs.
Lifetime or fixed-term?
Lifetime annuity: Use all or part of your pension pot to secure a guaranteed income for the rest of your life. The amount and payment frequency are agreed at the outset.
Short-term or fixed-term annuity: A less permanent option, these products provide regular income for a set period — typically between one and 40 years. They are sometimes marketed under different names, such as guaranteed income plans. At the end of the term, you receive a maturity lump sum, which you can reinvest in another annuity or transfer into a drawdown arrangement.
Level or escalating income?
A level annuity pays the same amount each year. It offers a higher starting income, but because payments do not rise with inflation, the real value of that income erodes over time.
An escalating annuity increases each year — either by a fixed percentage or in line with inflation. The trade-off is a lower starting income, but your spending power is preserved as prices rise.
Standard or enhanced rates?
If your health or lifestyle reduces your life expectancy, you may qualify for an enhanced annuity paying a higher income. Relevant factors include smoking, obesity, or a diagnosed medical condition. It is essential to disclose anything that might qualify you for better rates — your adviser or provider should then seek improved terms on your behalf.
Pense, our pension expert partner, offers an annuity calculator that can show the rates you might qualify for*. A standard annuity, by contrast, is based on average life expectancy adjusted for your location and pot size.
When do you want to be paid?
You can choose to receive payments monthly, quarterly, twice-yearly, or annually. You also decide whether income is paid in advance (immediately) or in arrears (at the end of each period). Opting for arrears often results in a slightly higher rate, because the provider keeps the money invested for longer.
What happens when you die?
Without any protection in place, payments stop on death and the pot used to fund the annuity is gone. Several options exist to provide for beneficiaries:
Value protection: Pays out any shortfall between the original pot value and the total income received, ensuring the remaining capital is not entirely lost.
Guarantee period: Ensures income continues to be paid for a fixed period even if you die before that period ends.
Joint life annuity: Continues paying income to a spouse, civil partner, or financially dependent beneficiary after your death, for the remainder of their life.
Each of these protections reduces the income rate you receive, so their value depends on your individual situation. There is also no guarantee you will benefit from them — for instance, you may outlive your nominated beneficiary under a joint life arrangement.
What does an annuity cost and how are rates calculated?
The upfront cost of an annuity is the size of the pension pot you use to purchase it. A larger pot generates a higher income. But the income you actually receive is determined by the annuity rate offered by the provider — and since that rate is locked in for the life of the product, shopping around is essential.
Rates vary based on pot size, age, health, location, and prevailing interest rates. Adding death benefits or income protections will reduce the rate. Note also that rates are calculated differently for lifetime and fixed-term products.
Additional costs to factor in include financial advice fees and any charges for setting up or administering the annuity. Some providers fold these into the rate rather than charging separately — always check the full cost structure before committing.
Are annuity rates good right now?
Rates have been rising steadily, and the picture at the start of 2026 looks encouraging for prospective buyers.
According to Standard Life, annuity rates continued their upward trajectory at the end of 2025, reaching 7.51 per cent for a healthy 65-year-old — up from 7.12 per cent in December 2024. On a £100,000 pot, that translates to an annual income of up to £7,510, compared with £7,120 previously, representing an additional £7,000 to £9,000 in expected lifetime income.
Data from Moneyfacts, published in March 2026, suggests further gains may be on the way. Rising gilt yields — driven in part by ongoing Middle East tensions — feed directly into annuity rate pricing, and the trend appears upward. Moneyfacts calculates that the average annual annuity income for a 65-year-old with a £50,000 pot now stands at £3,558, up £60 year-on-year from £3,498 in March 2025.
Where to get help
Deciding what to do with your pension is one of the most consequential financial choices you will make, and professional advice is strongly recommended. We've partnered with Pense*, UK-based pension specialists with access to market-leading annuity rates who will compare providers on your behalf.
> Use Pense's free annuity calculator to discover what you could access*
For broader retirement planning, Flying Colours* can help you develop a comprehensive financial plan tailored to your goals. And if you prefer to work with a local adviser, Unbiased* will match you with a qualified professional in your area.