TURNING your pension savings into a guaranteed income can give you peace of mind in retirement.
An annuity pays you a regular income, usually for the rest of your life, in exchange for some or all of your pension pot.
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But once you buy one, it can be difficult or impossible to change your mind.
That means it is important to understand how annuities work, compare your options and make sure the income you choose will cover your needs.
What is an annuity?
An annuity converts some or all of your pension savings into a guaranteed income.
You can usually choose to receive payments monthly or annually, and some annuities pay an income for life.
For example, if you used a £100,000 pension pot to buy an annuity with a 6% rate, you could receive around £6,000 a year before tax.
However, it’s important to note that actual annuity rates vary depending on your personal circumstances and the wider market.
Your age, health, the size of your pension and the type of annuity you choose are all factors.
The value of premiums paid into individual pension annuities reached £7.4billion in 2025 – the highest annual level since 2014, according to the Association of British Insurers (ABI).
Shop around before committing
You do not have to buy an annuity from your existing pension provider.
This is known as exercising your open market option.
Different insurers may offer different rates for the same pension pot, so it is worth comparing quotes before making a decision.
A higher rate could mean a higher income every year for the rest of your life.
For example, on a £100,000 pot, a 5% annuity rate would provide £5,000 a year, while a 6% rate would provide £6,000.
That £1,000 annual difference could add up to a substantial amount over time.
You can compare annuity options through MoneyHelper or speak to a regulated financial adviser who can help you assess the market.
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Be honest about your health
Your health and lifestyle can affect the income you are offered.
If you have certain medical conditions, or smoke or have other relevant health factors, you may qualify for an enhanced annuity.
This can pay a higher income because the provider may expect to pay you for a shorter period.
You will need to provide accurate information about your health when applying.
It is worth taking the time to check what information is relevant, as failing to disclose important details could affect your quote.
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Sticking with your current provider could cost you thousands of pounds in retirement.
That’s why Pense is offering free pension advice for people with pots of all sizes – whether it’s a drawdown or annuity.
Speak to one of their specialists to get a detailed breakdown of your options.
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Decide whether you want your income to rise
Some annuities pay a fixed income, while others increase each year.
An escalating annuity may help protect your spending power against inflation, but it will usually start at a lower rate.
For example, you might receive less income initially in exchange for annual increases.
Think about whether your essential spending is likely to rise and how much flexibility you need.
Consider what happens to your partner
You can choose an annuity that continues paying an income to your partner after you die.
This is known as a joint-life annuity.
You may also be able to choose a guarantee period, meaning payments continue for a set number of years even if you die shortly after buying the annuity.
These options can provide valuable protection for your family, but they generally mean a lower starting income.
Don’t forget the tax
Annuity income is generally treated as taxable income.
The amount of tax you pay will depend on your total income and your Income tax band.
This means it is worth considering how the annuity fits alongside your state pension, workplace pension and any other income.
Is an annuity right for you?
An annuity can provide security because you know how much income you will receive.
But it also means giving up access to the pension money used to buy it.
Pension drawdown, by contrast, allows you to keep your money invested and take an income as needed, although the value can rise and fall.
The right choice depends on your circumstances, how much income you need and how comfortable you are with investment risk.
A regulated financial adviser can help you compare the options before you commit.
The key is to shop around and understand exactly what you are buying because an annuity is a decision you may have to live with for decades.
Speak to regulated pension advisers Pense to find out if an annuity is right for you
