What Is an Annuity Pension?

An annuity pension provides a guaranteed income in retirement. Learn how annuities work, who they’re for, and how much income they offer.

What Is an Annuity Pension?

An annuity pension is a financial product that turns your pension savings into a guaranteed income for life (or for a set number of years). It offers security, peace of mind, and protection from the risk of outliving your money.

Once a common retirement option, annuities became less popular after pension freedoms were introduced in 2015, which gave retirees more flexibility. However, with rising interest rates, annuities are once again becoming attractive — especially for those seeking certainty in retirement.

This guide explains how annuity pensions work, when they might be right for you, and what to consider before buying one.

What is an annuity?

An annuity is a contract between you and an insurance provider. In exchange for a lump sum from your pension pot, the insurer agrees to pay you a regular income — usually monthly — for a period of time.

There are different types of annuities, but most commonly:

  • Lifetime annuities pay a fixed income for the rest of your life

  • Fixed-term annuities pay income for a set number of years (e.g. 5 or 10 years)

You can buy an annuity using money from any defined contribution pension, and you can choose to take up to 25% of your pot tax-free before using the rest to buy the annuity.

How does an annuity pension work?

Here’s how it works in practice:

  1. You build up a pension pot through a defined contribution scheme (such as a workplace pension or SIPP)

  2. At retirement (from age 55, rising to 57 in 2028), you decide to use all or part of your pot to buy an annuity

  3. You choose your annuity options: lifetime or fixed term, with or without inflation protection, single or joint

  4. The insurer calculates your income based on:

    • Your age and health

    • Annuity rates at the time

    • The size of your pension pot

    • The options you select (e.g. with spouse’s pension or not)

  5. Once purchased, the annuity starts paying you a regular, guaranteed income

It’s important to note that once you buy an annuity, it cannot usually be changed, cancelled, or cashed in.

Who are annuity pensions for?

An annuity may be suitable if you:

  • Want a guaranteed income for life with no investment risk

  • Are worried about outliving your pension pot

  • Prefer predictability and simplicity over flexibility

  • Don’t want to manage or monitor investments during retirement

  • Want to cover essential costs (like rent or bills) with a secure income

Annuities can also work well alongside drawdown — for example, you might buy a small annuity to cover basic expenses and use flexible drawdown for the rest of your spending.

Types of annuity

Here are the most common types:

 Lifetime annuity

Pays a fixed income for life. You can choose:

  • Level annuity – Income stays the same

  • Escalating annuity – Income increases each year (e.g. by 3% or in line with inflation)

 Joint-life annuity

Pays income for your lifetime and then continues (often at a reduced rate) to your spouse or partner after your death.

Guaranteed period annuity

Pays income for a set number of years (e.g. 10), even if you die within that period — ensuring value is returned to your estate.

Enhanced/impaired life annuity

Pays higher income if you have a qualifying health condition or lifestyle factor (e.g. smoking, high blood pressure). Always worth checking.

How much income will I get?

Annuity income depends on:

  • Your age – Older buyers typically receive higher rates

  • Health and lifestyle – Smokers or those with medical conditions may qualify for enhanced rates

  • Interest rates and gilt yields – Annuity rates improve when these rise

  • Your chosen options – Inflation protection and joint-life add value but reduce starting income

  • Your pension pot size – Bigger pots generate more income

Example:

A healthy 65-year-old with a £100,000 pension pot might receive:

  • Around £6,000–£7,000 per year from a single-life, level annuity

  • Around £5,000 per year with inflation protection

  • More with an enhanced annuity (if applicable)

You can use comparison tools or speak to a financial adviser to shop around — and you don’t have to buy your annuity from your pension provider.

Tax and annuities

  • The first 25% of your pension pot is usually tax-free

  • The income you receive from the annuity is taxed as income under PAYE

  • If you die before age 75, annuity payments may be passed on tax-free (depending on the product)

It’s important to factor in how the annuity will affect your total taxable income and any benefits you receive.

Advantages of annuity pensions

 Guaranteed income for life
 No investment risk or management required
 Peace of mind — you won’t run out of money
 Can be tailored to include spouse’s benefits or inflation increases
 Enhanced annuities offer more income if you're in poor health
 Can provide financial security for essential living costs

Disadvantages of annuities

 Irreversible – Once purchased, you can’t change your mind
 Poor value if you die early – You may receive less than you paid in
 Inflation risk – A level annuity loses value over time
 Inflexible – You can’t draw extra lump sums or adjust income
 May not be the best option for wealth preservation or passing on money to children

Should you buy an annuity?

An annuity could suit you if:

  • You want financial security and don’t want to take risks

  • You’re in poor health, qualifying for an enhanced rate

  • You’re worried about budgeting or living into your 90s

  • You don’t want to be hands-on with your money in retirement

But it may not be suitable if you:

  • Want flexible access to your money

  • Plan to leave money to your family

  • Are comfortable managing investments in drawdown

For many people, a mix of annuity and drawdown is the best way to balance security and flexibility.

Final thoughts

An annuity pension can provide certainty in uncertain times — giving you a secure, predictable income no matter how long you live. It won’t suit everyone, but for those who prioritise stability over flexibility, it can be a vital part of a balanced retirement plan.

If you’re considering an annuity, it’s wise to shop around, compare rates, and, if possible, get regulated financial advice to make sure you’re choosing the best product for your circumstances.