A pension annuity is a contract with an insurer. You exchange some or all of a defined contribution pension pot for a regular income. A lifetime annuity pays for the rest of your life, even if you live longer than expected. The money used to buy it is normally no longer an investment pot you can withdraw or leave to someone else.
How does it work?
You choose the features you need, obtain quotes and use the chosen pension amount to buy the policy. The insurer sets the starting income using factors including your age, health, market conditions and the options selected. Income from a pension annuity is normally taxable. Any tax-free cash taken beforehand reduces the amount available to buy income; eligibility and limits must be checked separately.
Once set up and past any cancellation period, you generally cannot reverse the purchase or change its terms. Compare providers before committing and check whether your existing pension includes a valuable guaranteed annuity rate.
The main choices
- Lifetime or fixed term: a lifetime policy continues while you live. A fixed-term policy pays for an agreed period and may include a maturity amount. Do not assume income continues after that term.
- Level income: payments stay the same in pounds. This commonly provides a higher initial income than increasing options, but inflation reduces its buying power.
- Increasing income: payments rise at a fixed percentage or track an index under the policy’s rules. The starting income is usually lower; fixed increases may not keep up with inflation.
- Single or joint life: single-life income normally stops on your death unless protection applies. Joint-life cover continues a specified proportion to a partner or other eligible dependant. Adding this protection usually lowers the starting income.
- Guarantee period: if you die during the chosen period, payments can continue under the contract. This protects early-death payments; it is not the end date of a lifetime annuity.
- Value protection: some policies can return part of the purchase price on death, after deductions defined by the policy. This is not the same as keeping an accessible pension balance.
- Enhanced annuity: health conditions and lifestyle information can qualify you for more income. Give providers complete, accurate information.
Annuity or drawdown?
An annuity can provide predictable income for essential costs. Drawdown keeps money invested and allows more flexibility, but withdrawals and investment losses can exhaust it. Some people use an annuity for part of their pension and retain the rest for flexibility. The right balance depends on circumstances, not just the highest initial payment.
Illustrate an income quote
The example below starts with an invented annual income of £6,000. It is not a current annuity quote or an estimate of what your pot could buy. Replace it with a provider’s quoted income. The chart shows payments and their inflation-adjusted buying power while you are alive; it does not price insurance or model payments after death.
Enable JavaScript to see the income chart.
Annual payments are shown for each policy year, with increases on each anniversary. Monthly amounts are annual income divided by 12; actual payment timing depends on the contract. Inflation is assumed constant. Tax is not calculated. The chosen chart horizon is not an annuity expiry date: lifetime income continues while you live. Fixed-term and survivor benefits are not modelled.
What to check before buying
Compare like-for-like quotes: purchase amount, payment frequency, increase rules, partner’s income, guarantee period, value protection and all charges. Review the personalised quotation, key features and full policy terms, cancellation rights and what happens on death. Ask about any existing pension guarantees before transferring. Consider regulated advice for an irreversible decision.
Sources and next steps: MoneyHelper’s annuity guide, compare annuity quotes and Pension Wise guidance.