Annuities
About Annuities
An annuity is a retirement product, offered by insurers, that turns some or all of your pension into a regular income guaranteed for life or for a fixed term. You can usually take up to 25% of your pension as tax-free cash and use the rest to buy the annuity. The income is then taxed as normal earnings.
Its strength is certainty. The income keeps coming however markets move and however long you live, which drawdown can't promise. The catch is that a standard annuity is permanent once set up, so the type you pick and the rate you lock in will shape your income for the rest of your life. Rates differ widely between providers, and poor health can mean a higher income. It pays to compare the whole market before you commit.
At Vintage Wealth Management, we advise on annuities as part of your wider retirement plan, alongside drawdown, your other pensions, and your tax position. We help you weigh whether an annuity suits you, how much of your pot to use, and how to secure the strongest rate available.
How does an annuity work?
You buy an annuity with your pension savings, and the insurer pays you a guaranteed income in return. You can usually take up to 25% of your pot as tax-free cash first, then buy the annuity with the rest. The income is taxed as normal earnings and, with a standard lifetime annuity, is paid until you die.
The income is fixed when you buy. It's set by the size of your pot, your age, your health, the annuity rate on the day, and the features you add. A 65-year-old in good health buying a single-life annuity gets the highest starting income. Adding a spouse's pension, a guarantee period, or annual increases lowers that starting figure, because the insurer pays out for longer or pays more over time.
Inflation is the main reason the starting figure can be misleading. A level annuity never rises, so at 3% inflation its buying power roughly halves over 24 years. An escalating annuity rises each year, either by a fixed percentage or in line with RPI, and starts around 30 to 40% lower as a result. Which costs you more depends on how long you live.
You don't have to annuitise the whole pot. A common approach is to buy an annuity covering essential fixed costs, such as your mortgage, council tax, and utilities, and leave the rest invested in drawdown. This is known as a blended or hybrid retirement income.
What are the different types of annuity?
Lifetime annuity
Fixed-term annuity
Enhanced annuity
Joint-life annuity
Level and escalating annuities
Annuities split into two broad groups. Lifetime annuities pay an income for the rest of your life. Fixed-term annuities pay for a set number of years and then end. Within those, you choose features that change how much you get and what happens when you die.
A lifetime annuity pays a guaranteed income until you die, however long you live. It's the most common type and the only retirement option that removes the risk of running out of money. The income can be level or escalating, single or joint life, and you can attach a guarantee period or value protection. Once it's set up it can't be changed.
A fixed-term annuity pays a guaranteed income for a set period, usually five or ten years, then returns a maturity sum you can reinvest, move into drawdown, or use to buy another annuity. It suits people who want secure income now but don't want to lock in a lifetime rate, often because they expect rates to rise or their health to change. You keep options open, but you carry the risk that rates are lower when the term ends.
An enhanced annuity pays a higher income if your health or lifestyle is likely to shorten your life expectancy. Conditions such as diabetes, high blood pressure, or heart disease can qualify, and so can smoking, being overweight, or taking regular medication. The uplift is significant. A smoker with a medical condition can receive 30 to 40% more income than a healthy person from the same pot. Around six in ten people who qualify never claim it, because they take their own provider's standard offer without disclosing their health.
A joint-life annuity continues paying an income to your spouse or partner after you die, usually at 50% or 100% of the original amount. The starting income is lower than a single-life annuity because it's expected to pay out for two lives rather than one. It's the standard choice for couples who rely on the same retirement income.
A level annuity pays the same income every year. It starts higher but loses buying power to inflation over time. An escalating annuity rises each year, either by a fixed percentage or in line with RPI, and starts lower in exchange for keeping pace with rising prices. The longer you live, the more an escalating annuity pays out in total.
How are annuity rates set?
An annuity rate is the income an insurer will pay for a given pension pot, shown as a percentage. A rate of 6% means a £100,000 pot buys roughly £6,000 of guaranteed income a year. Rates change constantly and vary between providers, so the figure you're quoted depends on who you ask and when. Five factors drive the rate you're offered:
| Factor | Effect on your rate |
|---|---|
| Gilt yields | Insurers back annuities with UK government bonds, so rates track gilt yields closely. Rising yields lift rates, which is why rates climbed sharply from 2022. The largest single factor. |
| Your age | The older you are when you buy, the higher the rate, as the income is paid for fewer expected years. |
| Health and lifestyle | Medical conditions, smoking, and weight can raise your rate through an enhanced annuity. |
| Type and features | Level pays more than escalating, single life more than joint life. A guarantee period or value protection lowers the rate. |
| Size of pot | Some providers pay better rates above certain pot thresholds. |
Because gilt yields move daily, annuity rates move with them. A quote is usually guaranteed for a short window, often two to four weeks, after which it has to be refreshed. Once you buy, the rate is locked for the life of the annuity.
The rate your own pension provider offers is rarely the best available. Income for the same pot can vary meaningfully across the market, and the only way to find the strongest rate is to compare providers with your health and lifestyle declared. This is the open market option, and securing the best rate across the whole market is what we do for you.
Annuity vs drawdown
An annuity gives you a guaranteed income for life. Drawdown keeps your pension invested and lets you take money out as you choose. An annuity removes investment risk but is permanent and inflexible. Drawdown keeps flexibility and any leftover fund for your family, but the money can run out.
| Annuity | Drawdown | ||
|---|---|---|---|
| Income | Guaranteed, fixed when you buy | Variable, depends on investment performance | |
| Runs out? | Never, with a lifetime annuity | Possible, if you withdraw too much or markets fall | |
| Flexibility | None once set up | Full control over how much you take and when | |
| Investment risk | Carried by the insurer | Carried by you | |
| Death benefits | Only if you add them, at a cost | Remaining fund can pass to beneficiaries | |
| Tax on death | Single-life annuity stops; joint-life or guaranteed continues | Unused funds fall within the estate for IHT from April 2027 |
An annuity tends to suit you if you need certainty to cover essential bills, you're worried about running out of money, or you don't want to manage investments in later life. Drawdown tends to suit you if you have other secure income, you want flexibility over withdrawals, and you want to pass the remaining fund on.
Why work with Vintage Wealth Management.
Why work with Vintage Wealth Management.
An annuity is one of the few financial decisions you usually can't reverse, so what you decide beforehand shapes your income for life. We work out whether an annuity suits you or whether drawdown, or a mix of both, fits better. If an annuity is right, we look across the open market rather than your existing provider alone, and factor in your age, health, and whether you want a fixed or rising income.
Vintage Wealth Management has advised on pensions and tax-efficient planning for over a decade. We're named in the FT Adviser UK Top 100 Financial Advisers every year since 2021, our team includes Chartered Financial Planners and Fellows of the Personal Finance Society, and we're authorised and regulated by the Financial Conduct Authority.
We have offices in Central London, North West London, Portsmouth, Buckinghamshire, Swindon, and Dublin.
If you're aged 50 or over, the government's free Pension Wise service offers impartial guidance on your options. When you're ready, get in touch with us.
Frequently asked questions about annuities
-
It depends on your age, health, the annuity rate on the day, and the options you choose. As a rough guide, a healthy 65-year-old buying a single-life level annuity might secure somewhere around 6 to 7% of their pot as annual income, so roughly £6,000 to £7,000 a year from £100,000. Rates change constantly, and an enhanced annuity or a joint-life option will change the figure.
-
Usually not. Once a lifetime annuity is set up it can't be cashed in, sold, or reversed, beyond a short cooling-off period of around 30 days after purchase. This is why the decision needs care before you commit. A fixed-term annuity is different, as it ends after its set period and returns a maturity sum.
-
It depends on the options you chose. A single-life annuity with no other features stops paying when you die. A joint-life annuity continues paying your spouse or partner, usually at 50% or 100%. A guarantee period keeps payments going to your beneficiaries for the rest of that period, and value protection can return part of the unused pot.
-
Yes. Annuity income is taxed as normal income through PAYE, at your usual rate. The 25% tax-free lump sum you can take from your pension before buying the annuity is separate and isn't taxed. Whether you pay basic, higher, or additional rate depends on your total income in retirement.
-
Neither is better outright. An annuity gives a guaranteed income for life with no investment risk, but is permanent and inflexible. Drawdown keeps your pension invested and accessible and can be passed on, but the income isn't guaranteed and the fund can run out. Many retirees use both, annuitising essential costs and keeping the rest in drawdown.
-
It's permanent. Once you buy a standard lifetime annuity you can't change it, access the capital, or get it back, even if your circumstances change. A level annuity also loses buying power to inflation over time, and a single-life annuity leaves nothing to your family unless you add features that lower the income.
-
There's no single best age, but annuity rates improve as you get older, because the income is expected to be paid for fewer years. Many people buy between 65 and 75. Buying earlier locks in income sooner but at a lower rate, while waiting can mean a higher rate, though you carry the risk that rates fall in the meantime.
-
An annuity may not suit you if you have enough secure income already, want to keep your pension invested for growth, or want to leave the fund to your family. People in good health buying young may also find the rate low. It often makes less sense for very small pots, where flexibility may matter more than a modest guaranteed income.
Disclaimer
The information supplied is based upon our understanding of current UK law and HM Revenue and Customs (HMRC) practice. Tax law and HMRC practice may change from time to time. The value of any tax relief will depend on the individual circumstances of the investor. An annuity provides a guaranteed income once purchased. The level of income depends on factors including annuity rates at the time of purchase, your age, health, and the options you select. Once a lifetime annuity is set up, it generally cannot be changed or cancelled. A pension is a long-term investment not normally accessible until age 55 (rising to 57 from April 2028). The Financial Conduct Authority does not regulate tax planning. The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied, is given in relation to such information. Vintage Wealth Management or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.