Source: Hargreaves Lansdown, as at 13 August 2026
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This article is for general guidance only and is not financial or professional advice. It contains promotional content and links to financial products. All figures and information in this article are correct at the time of publishing. Laws, entitlements, tax treatments and allowances may change in the future. Before you make any decisions, you should get independent professional advice.
Annuities have traditionally been a tried-and-tested way of providing an income in retirement from the money built up in a pension pot.
But because of the way they work, annuities and their popularity have a habit of ebbing and flowing according to the economic backdrop. This makes it difficult for would-be buyers to time their purchase to perfection.
So far this year, annuities are proving popular. And with major changes looming to key pension rules looming, commentators are predicting that this will remain the case for many months to come. But if you’re looking to generate pension income the question remains: should you buy one? Here’s our guide.
What’s on this page?
Annuities are a type of financial product mainly offered by insurance companies that pay a guaranteed income for life in exchange for a lump sum of cash – from a maturing pension plan, for example.
Annuities come in different versions. Most pay a level income until the annuitant dies. But more expensive versions are available, such as ones that are inflation-linked, or carry on paying an income to a named partner or beneficiary after an annuitant’s death.
In addition to pension drawdown, an annuity has traditionally been one of the main ways of producing retirement income from products such as personal and self-invested pension policies.
One of the key components of an annuity is the ‘annuity rate’, which shows the guaranteed income you’ll receive each year having taken one out.
As we explain below, the rate quoted will depend on a whole range of factors, from the would-be annuitant’s age to their state of health.
In this sense, annuity rates differ markedly from, say, the interest paid on a savings account. This will be the same for each customer opening an account, regardless of their age or health situation.
Annuity rates are expressed as a percentage. A rate of 5%, for example, on a pension pot of £100,000, would result in an income of £5,000 a year.
According to the pensions and investing platform Hargreaves Lansdown, a typical annual income for a 65-year-old with a £100,000 pension pot was £7,968 on 13 August 2026.
Quotes are provided before tax. Remember that annuity income may be taxable if your total annual income (including any state pension) is above the income tax threshold of £12,570.
The income you get from an annuity will depend on your own health, age and the type of annuity you choose. One that provides level or inflation-linked income, for example. The following will all be considered when the calculations are made.
Annuity rates are linked to interest rates and, in particular, gilt yields (in other words, the income from government bonds).
When gilt yields rise, as they have done recently with the Middle East conflict sparking inflation concerns, annuity rates are typically pushed up as well allowing providers to offer a higher income. In August, the 30-year gilt yield reached 5.85%, its highest level since 1998.
If you buy an annuity in a period of high interest and gilt yield, you’ll receive more than if these are low at the time of purchase.
Before making would-be customers an offer, annuity providers consider other factors as well. These include:
The older you are, the more your annuity will pay because the provider will expect to pay the income for fewer years. For example, a 65-year-old would be quoted a smaller income than a 75-year-old if each were to start receiving their payments at the same time from a £100,000 pot.
You are likely to receive a higher income, also known as an enhanced annuity, if you have poor health such as an existing medical condition, or if you smoke. This is because your life expectancy will be lower than a person in good health or who doesn’t smoke.
It’s essential to be clear and honest with your provider when you apply for the annuity so it can accurately calculate your annuity rate.
Basic annuities pay out a guaranteed income for an individual until they die. But other options exist.
For example, you could choose an annuity that pays an income to a surviving spouse, and/or one linked to inflation, so that your income increases as the cost of living rises.
Many annuities come with a standard guarantee period such as one, five or 10 years. If you die within that period, a person of your choice would continue to receive your annuity payments for the rest of that period.
Note that anything above a standard annuity becomes a more expensive option. In effect, you’d receive less income for the same lump sum.
It’s crucial to shop around for annuities because prices can vary.
David Little, financial planning partner at wealth management firm Evelyn Partners, says because annuities are back in favour again, more providers are entering the marketplace. “Shopping around is key – the difference in income between providers can be huge.”
You can use an annuity calculator to give you an idea of the rate and income to expect. There are several of these available, such as the one from Money Helper.
When looking at potential income from an annuity it’s useful to also work out how much money you’ll need in retirement.
The table shows example income rates from a £100,000 pension pot used to buy an annuity for a healthy 65-year-old.
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| Annuity type | Age 55 | Age 60 | Age 65 | Age 70 | Age 75 |
|---|---|---|---|---|---|
|
Single life, level, no guarantee |
£6,820 |
£7,209 |
£7,968 |
£8,709 |
£9,969 |
|
Single life, level, 5 year guarantee |
£6,808 |
£7,195 |
£7,906 |
£8,598 |
£9,714 |
|
Single life, (RPI), 5 year guarantee |
£4,337 |
£4,771 |
£5,585 |
£6,234 |
£7,565 |
|
Single life, 3% escalation, 5-year guarantee |
£4,737 |
£5,168 |
£5,895 |
£6,634 |
£7,830 |
|
Joint life 50%, level, no guarantee |
£6,465 |
£6,874 |
£7,406 |
£8,030 |
£8,819 |
|
Joint life 50%, 3% escalation, no guarantee |
£4,362 |
£4,778 |
£5,349 |
£6,093 |
£6,998 |
Source: Hargreaves Lansdown, as at 13 August 2026
The amount of income you receive from an annuity will depend on when you buy it. You’ll receive a higher income the later you leave it, because the insurer expects to pay out for a fewer number of years.
Rachel Vahey, head of public policy for AJ Bell, says the income you could receive also depends on market conditions, especially gilt yields, at that time which influence the annuity rates on offer.
“You may want to think about the timing of buying an annuity, taking advantage when gilt yields are strong. Alternatively, if you don’t need the income right now, you could perhaps leave it for later when you are older and may have developed conditions that entitle you to a better annuity rate.”
But if you need guaranteed income now, buying sooner will give you certainty.
The answer is: it depends, based on factors such as how long you’ll live, as well as whether it’s important to you to have a stable, predictable income.
According to savings analysts Moneyfacts, a standard annuity paid £100 more in August this year compared with six months earlier. For some, David Little says this could present an attractive opportunity to secure a guaranteed income stream from their pension pot.
But he warns that the current higher inflation/higher interest rate climate may reverse in the future. “For the right overall situation, annuities should be considered as part of the overall retirement planning picture. Once a traditional annuity is purchased it cannot be reversed,” Little says.
With unused pension pots due to be included within inheritance tax (IHT) calculations from April 2027, Moneyfacts anticipates that annuities could prove increasingly popular in the coming months.
Moneyfacts’ Rachel Springall says: “Annuities are due a resurgence in popularity over the coming years as they can reduce the overall value of an estate, with unused pension pots subject to IHT from next spring.
“There are varying income options on annuities. Making sure the annuity is set up to correctly suit a pensioner’s circumstances will be vital.”
AJ Bell’s Rachel Vahey says that although an annuity offers a guaranteed income, it’s not suitable for everyone. Some may prefer more flexibility to increase and reduce their income when they need to. In this case, income drawdown may be more appropriate.
“You may also want to keep their money invested to enjoy any increases in the stock market. For these people, drawdown might be a better solution allowing them to keep their money invested whilst still taking an income or a lump sum when they need it. Remember, an annuity only pays an income, you can’t take a lump sum from it when you need to.”
It’s worth looking at the pros and cons of annuities if you’re thinking about buying one and speaking to a professional. There is also help and advice available for free from The Money and Pensions Service.
Saga has partnered with HUB Financial Solutions, who can help you find the right annuity for you from the whole of market. If you take out an annuity using their service, Saga Money will earn a commission.
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