You’ve likely spent years preparing for retirement and envisioning the lifestyle you’d like to enjoy once work is officially behind you.
You might have even accumulated a significant pension pot through careful planning to help support this dream lifestyle.
As you explore some of the different ways to draw an income from your retirement fund, one option you might have overlooked is an annuity.
This allows you to convert some, or all, of your pension savings into a regular and guaranteed income, and recent figures show that the amount you receive could be favourable.
Indeed, MoneyWeek reports that annuity rates reached a 16-year high in March 2025.
While this might tempt you to purchase an annuity, you shouldn’t rush into the decision, as it is typically irreversible.
This is why it’s so important to shop around to find the annuity that is best suited to your needs. Despite this, it seems that many don’t. Research from Canada Life found that 31% of retirees bought their annuity from their existing pension provider without comparing options, potentially missing out on a higher income.
Continue reading to find out how annuities work, when they might be the right fit, and why reviewing your options could boost your retirement income.
When you purchase an annuity, you receive a guaranteed income for a set period of time
Simply put, an annuity is a type of insurance product you can purchase using part or all of your pension fund.
In return, you receive a guaranteed income, usually paid monthly or annually, for a specific period.
There are several different types of annuity available, each with features that affect how much income you’ll receive.
For instance, you can choose a “lifetime annuity” which pays a regular income for the rest of your life, or a “fixed-term annuity”, which provides an income for a set number of years.
The amount you receive then typically depends on several factors, such as:
- The size of your pension pot
- Your age and life expectancy
- Your health and lifestyle
- The annuity rates available at the time of purchase.
You may receive a higher income if you’re older or in poorer health, since the provider expects to pay out for a shorter period. There are even annuities – known as “enhanced annuities” – that are specifically designed for people with health conditions or lifestyle choices that may reduce their life expectancy.
You can also choose between a “single annuity”, which stops when you pass away, or a “joint annuity”, which continues to pay a proportion of your income to your partner or spouse after your death.
Additionally, some annuities offer a guarantee period, meaning that income is paid for a minimum number of years even if you pass away sooner. Alternatively, value protection can ensure that any unused value from your original pension fund is returned to your beneficiaries.
An annuity might suit you if you’re looking for financial security in retirement
If you’re looking for security in retirement and would prefer not to worry about stock market performance, an annuity could offer some much-needed peace of mind.
This is because once you purchase your annuity, you receive a guaranteed income that doesn’t fluctuate with the markets.
This reliability also makes it easier to plan your retirement spending. You’ll know exactly how much income to expect each year, potentially helping you to budget more confidently and avoid overspending.
There’s also the potential to receive more over your lifetime than you initially paid in. If you live longer than expected, the income from the annuity could exceed the total value of the pension savings you used to purchase it.
While this won’t always apply, it is one of the reasons some choose to purchase a lifetime annuity, especially when rates are favourable.
Due to their inflexibility, it’s vital to shop around before you commit to an annuity
Despite their many advantages, annuities do come with a vital drawback: they tend to be incredibly inflexible.
Once you purchase an annuity, you typically can’t alter the terms, access the capital, or transfer to a new provider. This lack of flexibility is partly why shopping around before you commit is so important.
Yet, many people seemingly don’t do this. According to the Canada Life research above, 1 in 8 retirees planning to purchase an annuity wouldn’t consider switching providers, even if that meant receiving more income.
This could be a significant missed opportunity, particularly given how much rates can vary between providers.
Which? shows that, as of 6 May 2025, a healthy 65-year-old with a £100,000 pension could receive anything from around £4,799 to £7,939 a year, depending on the annuity. This is a difference of more than £3,000 each year, potentially accumulating to tens of thousands over a typical retirement.
It’s also vital to review the terms and features on offer. Features such as inflation protection, fees and charges, and the financial security of your next of kin could all affect your wellbeing in retirement.
By comparing providers, you could give yourself the best chance of securing an annuity that offers the right balance of income and personalisation.
Get in touch
If you’re still unsure whether an annuity is right for you or can’t decide which product would best suit your needs, then we can help.
Make sure to get in touch today to find out how we can support you with your retirement planning.
Please note:
This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate estate planning.