How to Buy an Annuity: Is It Worth It and What Rates Are Available?

Understanding Annuities and Their Growing Popularity

Annuities have long been a topic of interest for retirees, but their popularity has fluctuated over the years. Following the introduction of pension freedoms in 2015, which allowed retirees to access their pension pots more flexibly, annuities fell out of favor. However, recent data suggests that they may be making a comeback.

In 2025, total spending on converting pensions into annuities increased by 4% to £7.4 billion, according to the Association of British Insurers (ABI). This growth occurred despite a slight decrease in annuity sales by 2%, indicating that people are opting to invest larger portions of their pension pots into annuities.

What is an Annuity?

An annuity is a financial product that provides a guaranteed income in exchange for part or all of your pension pot. It functions as a form of insurance rather than an investment, protecting you from the risk of outliving your savings. Once you purchase an annuity, your income is guaranteed for life or for a set period.

This type of product became less popular after 2015 when pension freedoms allowed retirees to access their funds more freely. However, with the upcoming changes in inheritance tax rules, annuities are once again being considered as a viable option.

Starting April 2027, pensions will be subject to inheritance tax, which could make it more appealing for retirees to use up their pension pots rather than pass them on with a potential tax liability.

How Do Annuities Work?

Annuities can be straightforward, but there are several choices to consider when purchasing one. Once you’ve bought an annuity and started receiving payments, you cannot change your decision. You must decide whether to exchange your entire pension pot or just a portion, and whether you want income for life or for a fixed period.

The exact features and options available depend on your personal circumstances and life expectancy. It’s advisable to consult a financial adviser to help with retirement planning. We’ve partnered with Flying Colours who can help you develop a tailored plan.

Otherwise, you can find a local financial planner using Unbiased, a service that matches you to a professional based on your needs.

Key Decisions When Buying an Annuity

Here are some key decisions you need to make:

Do You Want an Income for Life or a Fixed Period?

Lifetime Annuity: Use all or part of your pension pot to secure a guaranteed income for the rest of your life.
Short-Term or Fixed-Term Annuity: Get a regular income for a set period, often between one and 40 years.

Do You Want Your Income to Increase Each Year?

Level Annuity: Your income stays the same each year, which doesn’t adjust for inflation.
Escalating Annuity: Your income increases each year, either by a set percentage or linked to inflation.

Will You Qualify for an Enhanced Annuity?

If your health or lifestyle means your life expectancy is shorter than average, you may qualify for a higher income. Examples include smoking, being overweight, or having a medical condition.

How Frequently Do You Want Your Annuity Income?

You can choose to receive your income monthly, annually, or at other intervals. Payments can also be made in arrears or in advance.

How Do You Want the Annuity to Work After You Die?

There are protections available that allow payments to be made to your beneficiaries after your death. These include value protection, guarantee periods, and joint life annuities.

How Much Does an Annuity Cost?

The cost of an annuity depends on the size of your pension pot and the annuity rate you receive from the provider. Rates vary and are fixed for the entire duration of the annuity. It’s important to compare your options by shopping around.

Annuity rates depend on factors such as the size of your pot, your age, health, and where you live. They are also closely linked to interest rates.

Where Do Annuity Rates Currently Stand?

As of March 2026, the average annual annuity income for a 65-year-old buying a single life level annuity for a £50,000 purchase price is £3,558. This is an increase of £60 from March 2025.

According to Standard Life, annuity rates continued to rise at the end of 2025, reaching 7.51% for a healthy 65-year-old. This represents an increase from 7.12% in December 2024.

Get Professional Advice on Annuities

It’s crucial to seek professional financial advice when deciding what to do with your pension funds. An adviser will consider all your options and build a tailored financial plan for you.

We’ve partnered with Pense, UK-based pension experts who can help you find the right annuity. They have access to market-leading annuity rates and will compare providers to help you get the best deal.

Use Pense’s free annuity calculator to discover what you could access*

For broader retirement planning, we’ve also partnered with financial advisor, Flying Colours. They can help you build the retirement you want by developing a tailored plan.