UK Annuities Guide (Lifetime Annuity, Fixed Term, Enhanced)

What Is an Annuity?

An annuity is a contract with an insurance company. You give them a lump sum (typically from your pension pot), and in return they promise to pay you a regular income for the rest of your life (or for a fixed period). The amount you receive depends on several factors: your age — older people get higher rates because their life expectancy is shorter; health — people with medical conditions qualify for enhanced rates (more income per £1,000 of pot); interest rates — annuity rates are linked to gilt yields, which have risen significantly since 2022; type of annuity — level annuities pay more than escalating annuities; spouse benefits — a joint-life annuity pays less than a single-life annuity because the payments continue to a spouse after your death. Once you buy an annuity, you generally cannot change your mind (there is a 30-day cooling-off period). The money is gone — you cannot access the lump sum again. This irreversibility is why many retirees hesitate to buy annuities and prefer drawdown instead. However, the security of a guaranteed lifetime income is valuable for covering essential living costs in retirement. For many retirees, having a baseline guaranteed income that covers essential bills provides peace of mind, while keeping other savings in drawdown for flexibility and discretionary spending. The decision between annuities and drawdown is not necessarily an either/or — using both can provide the best of both worlds. Drawdown vs annuity →

Types of Annuities

There are several types of annuity, each with different features. Single life annuity — pays income for your life only. When you die, payments stop and there is no value left for your estate. This is the highest-paying type. Joint life annuity — continues paying a reduced income (typically 50–67%) to your spouse or partner after your death. Lower starting income than single life. Level annuity — fixed income that does not change. Highest initial income but loses purchasing power over time due to inflation. Escalating annuity — income increases each year, typically by a fixed percentage (3% or 5%) or in line with RPI. Lower starting income but maintains purchasing power. Fixed-term annuity — pays income for a fixed period (e.g., 5, 10, or 15 years), not for life. At the end of the term, you get a guaranteed maturity amount (usually the original pot minus income paid). Useful as a temporary bridge to state pension age. Enhanced annuity — higher rates for people with medical conditions or lifestyle factors (smoking). Includes impaired life annuities (specific medical conditions), smoker annuities, and lifestyle annuities (e.g., hazardous occupations). Investment-linked annuity — income varies based on investment performance. Higher potential but with risk. Value-protected annuity — guarantees that if you die before receiving total payments equal to your purchase price, the difference is paid to your estate. Drawdown alternative →

Annuity Rates 2026

Annuity rates in 2026 are the most competitive since before the 2008 financial crisis. For a 65-year-old with a £100,000 pot, a single-life level annuity pays approximately £6,500–£7,000 per year (6.5–7% yield). A joint-life (50% spouse pension) level annuity pays approximately £5,500–£6,000 per year. An escalating annuity (3% annual increase) might pay £4,000–£4,500 initially. Rates are at these levels because the Bank of England base rate is around 4.25% and gilt yields are correspondingly higher. When interest rates fall, annuity rates will fall too. Rate history: in 2021, a 65-year-old with £100,000 could only get around £4,500 per year (4.5%). The improvement to 6.5–7% represents a 50%+ increase. Factors affecting your rate: age (70-year-old gets higher than 60-year-old), gender (women get slightly less than men due to longer life expectancy — though rules apply), health (smokers and those with conditions get more), where you live (postcode affects life expectancy calculations), and the size of your pot (larger pots may negotiate better rates). Shopping around through the Open Market Option is essential — rates vary significantly between providers. Using a broker like Hargreaves Lansdown or specialist annuity brokers can get you the best rate. Pension tax-free cash →

How to Buy

Buying an annuity involves several steps. 1. Receive your retirement wake-up pack — your pension provider must send you information about your options (drawdown, annuity, or lump sum) at least 4 months before your selected retirement date. 2. Use the Open Market Option (OMO) — you are not required to buy an annuity from your pension provider. The OMO allows you to shop around all annuity providers to get the best rate. Research shows that using OMO can increase your income by 20–30% compared to accepting your existing provider's offer. 3. Compare rates — use comparison websites like Moneyfacts, Hargreaves Lansdown, or specialist annuity brokers who can search the entire market. 4. Provide medical and lifestyle information — even if you think you are healthy, disclose everything. Small medical conditions can qualify you for enhanced rates. Smoking, high blood pressure, diabetes, heart conditions, and being overweight can all increase your income. 5. Choose your annuity type — decide on level vs escalating, single vs joint life, and any additional features. 6. Apply — complete the application with your chosen provider. 7. Cooling-off period — you have 30 days to change your mind after purchase. If you are married, your spouse may need to consent to a single-life annuity (to protect their rights). Drawdown alternative →

Enhanced Annuity

An enhanced annuity (also called an impaired life annuity) pays a higher income because your life expectancy is shorter than average. Qualifying conditions include: smoking — smokers can get up to 15–20% higher income than non-smokers. If you have quit for less than 12 months, you still qualify as a smoker. Diabetes — Type 1 and Type 2 diabetes can qualify for enhanced rates, with Type 1 generally getting higher enhancements. High blood pressure (hypertension) — controlled or uncontrolled, this can boost your rate. Heart conditions — heart attack, angina, heart surgery, or other cardiovascular conditions can significantly increase rates. Cancer — many cancers qualify for enhancements, especially if the diagnosis was recent. Other conditions — stroke, respiratory conditions (COPD, asthma), kidney disease, multiple sclerosis, Parkinson's, and many others. Lifestyle factors — hazardous occupations (mining, offshore), high BMI (over 30), and alcohol consumption can also qualify. You must disclose all relevant information. Annuity providers assess your health and lifestyle through a medical questionnaire. Some may request a GP report. The enhancement can be as high as 40–50% for severe conditions. Even if you do not think you have health issues, it is worth answering the medical questions — many people qualify for at least a small enhancement. Tax-free cash planning →

Annuity Taxation

Annuity income is taxed as earnings at your marginal rate of income tax. Unlike pension tax-free cash (which is 25% of your pot), annuity payments are fully taxable. Most annuity providers pay your income net of basic rate tax (20%) under PAYE. If you are a basic-rate taxpayer, your tax is largely handled automatically. If you are a higher-rate or additional-rate taxpayer, you must declare the income on your self-assessment tax return and pay the additional tax due. If you are a non-taxpayer, you can register to receive annuity payments gross (without tax deducted) by informing HMRC. The personal allowance (£12,570 in 2026/27) means you can receive some annuity income tax-free. An annuity is not a pension commencement lump sum — the 25% tax-free element only applies when you take money from your pension pot to buy the annuity. Once you have purchased the annuity, all payments are taxable. If you buy an annuity within a SIPP or other pension wrapper, the provider handles the tax. If you buy an annuity with non-pension money (a purchased life annuity), a portion of each payment is treated as a return of capital and is tax-free — this does not apply to pension annuities. Drawdown tax treatment →

Open Market Option and Shopping Around

When you buy an annuity, you are not required to buy from your existing pension provider. The Open Market Option (OMO) gives you the right to shop around across the entire annuity market to find the best rate. This is crucial because annuity rates vary significantly between providers — sometimes by 15–20% for the same type of annuity. Using the OMO could increase your retirement income by thousands of pounds over your lifetime. To use the Open Market Option effectively, start by gathering quotes from multiple providers. Use an annuity broker or comparison service that searches the whole market, as not all annuity providers are available through every broker. Provide accurate health and lifestyle information — enhanced annuities for smokers, people with medical conditions (diabetes, high blood pressure, heart conditions, cancer), or those with a lower life expectancy can pay significantly higher rates. These enhanced terms are often available even with relatively minor health issues. Also consider whether you have a guaranteed annuity rate (GAR) in your existing pension policy. Older pensions (particularly from the 1980s–1990s) sometimes have GARs that are much higher than current market rates. In this case, staying with your existing provider may be better than shopping around. Before making any decision, consider taking financial advice. The Financial Conduct Authority recommends that anyone considering an annuity should consider taking advice before proceeding, particularly for larger pension pots. An adviser can help you navigate the complex trade-offs between different annuity features and find the best product for your circumstances.

FAQs

What happens to my annuity if I die soon after buying it?

If you buy a single-life annuity with no guarantee period and die shortly after, the payments stop and there is no value left for your estate. To protect against this, you can add a guarantee period (e.g., 5 or 10 years) — if you die within that period, payments continue to your beneficiaries for the remainder.

Can I sell my annuity for a lump sum?

Since April 2017, you can sell a lifetime annuity on the secondary annuity market. However, the market has not developed as expected, and most annuity holders would receive significantly less than the original purchase price due to the discounting of future payments.

Should I take my 25% tax-free cash before buying an annuity?

Yes, typically. You should take the 25% tax-free cash from your pension pot before using the remaining 75% to buy an annuity. This way, you receive the tax-free cash separately and only annuitise the taxable portion. Taking the tax-free cash first does not affect your annuity purchase.

Can I buy an annuity in stages?

Yes. You can use a phased retirement strategy — buying smaller annuities at different ages. This spreads the interest rate risk (you do not lock in a single rate) and allows you to buy larger annuities at older ages when rates are higher.

Are annuities better value than drawdown in 2026?

With current rates at 6–7%, annuities offer better value than they have in over a decade. For a 65-year-old, a £100,000 annuity pays approximately £6,500/year for life. Using the 4% rule, the same pot in drawdown would yield £4,000/year. However, the annuity income is fixed (no growth potential) and nothing remains for heirs. The best approach for many is a combination of both.