Annuities: Guaranteed Income Is Back in Fashion

An annuity is the simplest deal in retirement finance: hand an insurer a lump sum from your pension, receive a guaranteed income for the rest of your life — however long that is. After a decade of rock-bottom rates made them look terrible, higher interest rates restored annuities to genuine competitiveness, and the market has boomed. The product deserves a fresh look, prejudices left at the door.

What your money buys

Rates move with age, gilt yields and health, so treat any figure as illustrative — but the recent shape: a healthy 65-year-old with £100,000 might secure roughly £7,000+ a year, level, for life. The number that matters is the comparison: that is comfortably above a cautious drawdown withdrawal rate, because an annuity pools longevity risk — those who die early subsidise those who live to 100, and you might be the 100. What drawdown offers instead is flexibility, growth potential and inheritance (drawdown explained); an annuity trades all three for certainty. Neither is "better" — they price different fears.

The options sheet, decoded

• Level vs escalating: level annuities start higher but inflation erodes them — 20 years of 3% inflation nearly halves buying power. RPI-linked or fixed-escalation versions start notably lower and catch up slowly. Many buyers split the difference with partial escalation, or accept level income alongside the inflation-linked state pension.
• Single vs joint life: single stops at your death; joint continues (typically 50–67%) for your partner. For couples, single-life without a plan for the survivor is the classic regretted choice — see how it interacts with death benefits generally.
• Guarantee periods: payments continue for a minimum term (5–30 years) even if you die early — cheap protection against the "bus next year" fear that puts people off annuities.
• Enhanced annuities — always apply: smoking, diabetes, blood pressure, heart history, many common conditions increase your rate, sometimes by 20–40%. Insurers pay more because they expect to pay for less long. Disclose everything; this is the one financial product where poor health is worth money.

The rules of engagement

You do not need to annuitise everything (partial annuities are standard), you can annuitise in stages as age improves your rate, and you are never obliged to buy from your pension provider — the open market option routinely improves rates by meaningful margins, so compare via broker or the MoneyHelper comparison tool. The 25% tax-free lump sum can be taken first, with the balance annuitised; annuity income itself is taxable like salary. One more note: buying a standard lifetime annuity does not trigger the MPAA, unlike flexible withdrawals — relevant if you plan to keep contributing.

The blend most people should consider

The modern consensus is unglamorous: secure the floor, invest the rest. Add up essential spending; subtract state pension; annuitise enough to cover the gap so that no market event can touch your bills; run drawdown on the discretionary layer for flexibility and legacy. Revisit the balance every five years — annuity rates improve with age, and the appetite for managing drawdown reliably declines with it. The 75-year-old converting drawdown to annuity is executing a plan, not admitting defeat.

This is general information, not personalised financial advice. Rules and allowances change, and your right decision depends on your own circumstances — for anything that affects your money long-term, it is worth checking the current figures on GOV.UK or speaking to a regulated financial adviser (MoneyHelper offers free, impartial guidance).