The deal in one sentence
You hand an insurer a lump sum from your pension; the insurer pays you an income — typically for the rest of your life — no matter what markets do and no matter how long you live. The insurer pools thousands of customers: those who die early subsidise those who live long. That pooling is the one thing drawdown can never replicate, and it's why annuities remain the only mainstream product that removes both investment risk and longevity risk.
The types, decoded
| Type | What it does | The trade-off |
|---|---|---|
| Level, single-life | Fixed income for your life only | Highest starting income; inflation erodes it, nothing for a partner |
| Escalating / RPI-linked | Income rises each year (fixed % or inflation-linked) | Starts substantially lower; takes years to overtake a level annuity |
| Joint-life | Keeps paying (usually 50–67%) to a surviving partner | Lower income in exchange for the second life covered |
| Guarantee period / value protection | Pays for a minimum term, or refunds unused capital, if you die early | Small income reduction for a floor under the "die early, lose it all" fear |
| Enhanced / impaired | Higher income if your health or lifestyle suggests shorter life expectancy | None — if you qualify, it's simply more money for the same pot |
| Fixed-term | Income for a set period (e.g. 5–10 years), then a guaranteed maturity amount | Not lifetime security — a bridge product, often to State Pension age |
What moves the number
Annuity income is quoted as a rate: roughly, the annual income per £100,000 of pot. It's driven by long-term interest rates (gilt yields), your age, your health, and the options you bolt on. Two consequences worth internalising:
- Rates change with the rate environment. The dismal quotes of the 2010s and the far healthier ones of recent years are the same product priced in different interest-rate worlds. Never assume a quote from two years ago — or a friend's — says anything about yours.
- Honesty pays, literally. With enhanced annuities, disclosing health conditions, medications and smoking increases your income. It's the one financial questionnaire where the incentive runs entirely in favour of full disclosure.
The single biggest mistake: not shopping around
You are never obliged to buy your annuity from your pension provider. The "open market option" lets you take your pot to whichever insurer quotes best, and the FCA's own market studies found differences worth thousands of pounds over a retirement between best and worst quotes — before health disclosure, which widens the gap further. MoneyHelper runs a free annuity comparison tool; an FCA-authorised adviser or broker can also search the market (ask how they're paid).
Annuity or drawdown?
The honest answer is that it's not either/or — it's a question of how much guaranteed income your retirement needs as a floor:
| Annuity | Drawdown | |
|---|---|---|
| Income | Guaranteed, for life | Flexible, but can run out |
| Investment risk | None (insurer's problem) | Yours, including sequencing risk |
| Inflation | Only if you buy escalation | Growth can outpace it — no promise |
| Flexibility / inheritance | Fixed at purchase; limited death benefits | Full flexibility; remaining pot can pass on |
| Reversible? | No — permanent | Yes — you can annuitise later (often at better age-driven rates) |
A common structure: annuitise enough (with the State Pension) to cover essential bills forever, and run the rest as drawdown — stress-test that flexible layer with our drawdown sustainability calculator. The wider decision landscape is mapped in retirement income options.
Before you sign anything
- It's permanent. A lifetime annuity cannot be unwound. This is the definition of a decision worth paying for advice on — and from 50 you can use Pension Wise free first.
- Quote with full health disclosure, from multiple insurers, with the same options on every quote so they're comparable.
- Think in real terms. A level £10,000 buys much less in 20 years. Compare level vs escalating with your own inflation view — the inflation impact calculator makes the erosion visible.
- Decide the death benefits deliberately — joint life, guarantee period, value protection — rather than defaulting to the highest headline income.
- Verify the insurer and any adviser on the FCA Register — the vetting toolkit shows how.
Common questions
Can I use part of my pot for an annuity and keep the rest in drawdown?
What happens to my annuity when I die?
Is an annuity protected if the insurer fails?
Sources and further reading
MoneyHelper — annuities explained (and free comparison tool) · FCA — retirement income market data · Pension Wise — free guidance from 50 · FSCS — pension and annuity protection
About this guide: general education only — not regulated advice, not a personal recommendation, and not a financial promotion of any insurer or product. Annuity rates are individual and time-sensitive; get personal quotes and verify figures before deciding. Buying a retirement income is a textbook case for an FCA-authorised adviser.