Should You Buy an Annuity? The Pros, Cons, Pitfalls and Questions to Ask - A UK Guide for 2026

Annuity rates are the best in over a decade. That doesn't automatically mean an annuity is right for you. Here's an honest assessment of how they work, who benefits most, what to watch out for and the questions every provider should be able to answer.

 

For most of the last decade, annuities were easy to dismiss.

Rates were historically poor. The 2015 pension freedoms gave everyone the option of drawdown instead. And the received wisdom hardened quickly: flexible drawdown was for people who knew what they were doing, annuities were for people who didn't want to think about it.

That received wisdom deserves revisiting.

Annuity rates in 2026 are the best in over a decade. A 65-year-old with a £100,000 pension pot can now secure roughly £7,500 per year of guaranteed income for life - up from barely £5,000 just three years ago. [Legal and General](https://www.legalandgeneral.com/insurance/life-insurance/definitions/death-in-service-v-life-insurance/) That's a 50% increase in the income the same pot can generate. It changes the calculation in ways that deserve honest attention.

But - and this is the FreeBefore65 position - "rates are good" doesn't automatically mean an annuity is right for you. The decision depends on your age, your health, your pot size, your other income sources and how you feel about permanently trading flexibility for certainty. The annuity market also has specific pitfalls that providers won't emphasise and questions that most people don't think to ask.

 

This post covers all of it. As much as I can.

As always - I'm not a financial adviser and this isn't personal advice. The annuity decision is one of the most consequential and most irreversible in retirement planning. For a pot of any significant size, taking regulated independent advice before committing is genuinely worth the cost.

 

What an annuity actually is

An annuity is a contract with an insurance company. You hand over a sum of money - typically from your pension pot, after taking your 25% tax-free cash - and in return the insurer pays you a guaranteed income for life, regardless of how long you live and regardless of what markets do.

The rate determines how much you receive. If you have a pension pot of £100,000 and the annuity rate is 7%, you'll get an annual income of £7,000. A healthy 65-year-old can currently get an annual income of £7,840 in return for £100,000. [Pensionssharedservice]

The income is guaranteed. It cannot fall. It cannot run out. If you live to 105 the insurer keeps paying. If you die at 68 - in most standard annuities - the payments stop and the insurer keeps the remaining capital.

That last point is the heart of the annuity trade-off. Certainty now in exchange for flexibility and capital later. Whether that trade is worth making depends entirely on your specific situation.

 

Why annuity rates have improved so dramatically

Understanding why rates have risen helps you assess whether now is a good time to buy.

Annuity rates are closely tied to interest rates. When interest rates are high, so are annuity rates. With interest rates at a 16-year high, a 65-year-old with a £100,000 pension can get 55% more annuity income than someone the same age three years ago. [Drewberry]

The mechanism is straightforward. Insurers invest the premiums they receive in long-term government bonds - gilts. When gilt yields are high, insurers earn more on those investments and can afford to offer better rates to annuity buyers. Gilt yields have stabilised at historically reasonable levels in 2026, supporting annuity rates that are significantly better than the ultra-low rates seen between 2016 and 2021. [My Tribe Insurance]

The risk is that this cuts both ways. If interest rates fall significantly - as they did after 2008 and again in the 2010s - annuity rates could deteriorate. There's no guarantee that rates will remain high. While rates have risen over the last few years, deciding when to buy depends on your personal needs and circumstances rather than trying to time the market. [MoneySuperMarket] Each year you delay buying is a year of income payments you don't receive.

 

The different types of annuity - and why the choice matters

Not all annuities are the same product. The type you choose significantly affects both the income you receive and how the contract behaves over your lifetime.

• Single life versus joint life

A single life annuity pays until your death and then stops. A joint life annuity continues to pay a percentage - typically 50% or 100% - to your spouse or partner after you die. A joint life annuity also converts your pension savings into guaranteed income, but when you pass away it continues to pay your chosen beneficiary a regular income, either in full or as a percentage of what you were receiving. [SunLife]

Joint life annuities pay less per month than single life annuities for the same pot - because the insurer is covering two lifetimes rather than one. For couples where both partners depend on the pension income, joint life is almost always the right choice. For single people it's irrelevant.

• Level versus escalating

A level annuity pays a fixed income for life. The same amount in year one as in year twenty-five. You can normally choose for your income to increase each year, either by a fixed percentage - normally 3% or 5% - or by linking it to inflation via the Retail Prices Index. Choosing an escalating annuity means your starting income will be lower, but it will be better protected against inflation. [Drewberry]

The level annuity gives you more money now. The escalating annuity gives you more protection against the erosion of purchasing power over time. The escalating annuity overtakes the level annuity in income terms after about 14 to 16 years. [WeCovr] At current rates a 65-year-old choosing an RPI-linked annuity over a level one takes a meaningful hit to starting income in exchange for long-term inflation protection.

Which is right depends on your starting income, your other inflation-linked income sources - the State Pension has the triple lock - and how long you expect to live. There is no universal answer.

• Enhanced annuities - the most underused option

Around 60% of people could qualify for an enhanced annuity rate. Always declare any health conditions. [WeCovr]

An enhanced annuity - sometimes called an impaired life annuity - pays a higher income to people with health conditions or lifestyle factors that reduce life expectancy. The insurer is taking a smaller risk - they expect to pay out for fewer years - so they offer a better rate.

When quotes were run for a 65-year-old with a £100,000 pot looking for a single-life annuity, the income was between 6% and 15% more for an enhanced annuity based on an overweight smoker taking medication for high blood pressure and high cholesterol, compared with a standard annuity. [Pensionssharedservice]

The conditions that qualify for enhanced rates include type 2 diabetes, heart disease, high blood pressure, high cholesterol, cancer history, kidney disease, stroke history and many others. Smoking and obesity also typically qualify. Many people assume they're in good health for annuity purposes when they're actually entitled to a significantly higher income.

This is one of the most practically important points in this post. If you have any health condition worth disclosing - however minor it might seem to you - disclose it. The worst that can happen is that it makes no difference. The best is that your annual income increases meaningfully for the rest of your life.

• Guaranteed periods

A standard annuity pays until death and then stops. A guaranteed period annuity continues to pay for a minimum fixed period - typically five or ten years - even if you die before it expires. The remaining payments go to your estate.

You can choose to include guarantees that ensure payments continue for a certain number of years after death. While this offers peace of mind, it may slightly reduce the initial annuity rate. [SunLife]

For someone with dependants or a concern about dying early and losing all the capital, a guaranteed period adds protection at a modest cost to the income rate

• Deferred annuities

A deferred annuity is one you set up to pay out from a chosen date in the future. For example, a person retiring at 65 might buy a deferred annuity that is due to start paying out when they reach 80 and live off other income such as drawdown in the meantime. An annuity paying out from age 80 will be much more generous than one paying out from 65. [WUHLD]

This is a genuinely interesting option for early retirees. Buying a deferred annuity at 65 that pays from 80 removes longevity risk - the fear of outliving your money - at lower cost than buying an immediate annuity. The rates at 80 are substantially better than at 65. The risk is dying before the annuity starts paying - though guaranteed period options can mitigate this

Deferred annuities are not widely used in the UK but deserve more attention than they get, particularly for people planning a drawdown period followed by a guaranteed income floor in later life.

 

The pros - what annuities genuinely offer

• Guaranteed income for life

This is the core benefit and it's a real one. The simplicity is the appeal: no investment decisions, no market risk, no worrying about running out of money. [Legal and General] You know exactly what you'll receive every month for the rest of your life

For someone who doesn't want to manage investments in retirement, who finds drawdown anxiety-inducing, or who simply wants the certainty of knowing their essential costs are covered regardless of what markets do, an annuity delivers something genuinely valuable.

• No sequencing risk

The sequencing risk we've covered in detail in the drawdown strategy post - the danger that poor early returns permanently damage a drawdown pot - simply doesn't exist with an annuity. The income is fixed and guaranteed regardless of market conditions.

• Simplicity

An annuity requires no annual reviews, no investment decisions, no rebalancing. You set it up once and the income arrives until you die. For people who don't want to actively manage their retirement finances it removes a substantial ongoing burden.

• Current rates are genuinely attractive

The current best single life annuity rate for a 65-year-old is 7.79% from Aviva as of May 2026. [Royal London] On a £100,000 pot that generates £7,790 per year of guaranteed income for life. On a £300,000 pot the equivalent guaranteed income is approximately £23,370 per year - inflation-free certainty, forever.

 

The cons - the honest case against

Irreversibility

This is the most significant downside and worth stating plainly. Once you purchase an annuity, your decision is irreversible. You cannot reclaim the lump sum. [WUHLD] The capital is gone. If your circumstances change - if you need a large sum for care, if your health deteriorates rapidly, if interest rates rise further making better annuities available - you cannot undo the decision.

This irreversibility is not a reason never to buy an annuity. But it is a reason to be certain before you do.

• Inflation erosion on level annuities

A level annuity that pays £7,000 per year today pays £7,000 per year in twenty years. At 3% average inflation, the real value of that income falls by roughly 45% over twenty years. What covers your costs today may not cover them adequately in your seventies and eighties.

The escalating option addresses this but at the cost of lower starting income. The trade-off is genuine and worth modelling against your other income sources.

• You could die early

If you die shortly after buying an annuity, in most standard arrangements the insurer keeps the remaining capital. For those who prioritise leaving wealth to family, drawdown generally offers better inheritance options than a standard annuity even with the 2027 IHT changes. [Legal and General]

The guaranteed period option and joint life arrangements mitigate this to a degree. But the basic annuity remains a poor vehicle for people whose primary goal is passing wealth to the next generation.

• Loss of flexibility

In drawdown you can take more in some years and less in others. You can respond to unexpected costs, investment returns and changing income needs. An annuity locks you into a fixed income with no flexibility to vary it.

 

The April 2027 IHT change shifts the calculus slightly

From April 2027, unspent pension pots become part of the estate for IHT purposes. The traditional argument for preserving capital in drawdown rather than buying an annuity - keeping the capital tax-efficiently for heirs - becomes less compelling when that capital faces a potential 40% IHT charge anyway.

This doesn't make annuities automatically better. But it removes one of the strongest arguments against them for people with estates above the IHT threshold. We've covered this in detail in the Wills, LPA and Estate Planning post and the Bridge Years post.

 

The pitfalls - what providers won't emphasise

• Accepting the first quote

This is the single most expensive mistake most annuity buyers make. Research consistently shows that fewer than half of retirees shop around for an annuity. Those who do use the Open Market Option typically receive 10 to 20% more income than those who simply accept their existing provider's quote. [My Tribe Insurance]

Don't automatically accept the annuity rate offered by your pension provider without checking what's on offer across the rest of the market. [Pensionssharedservice] You have a legal right - called the Open Market Option - to buy your annuity from any provider, not just the one holding your pension. Use it.

The gap between the best and worst annuity rates on the market can be as wide as 15 to 20%. On a £200,000 pension pot, that could mean the difference of £2,000 to £3,000 per year - money that compounds over a 20 or 30-year retirement into tens of thousands of pounds. [My Tribe Insurance]

• Not disclosing health conditions

As covered above, the amount of income you could get will depend on factors including your health and lifestyle. These could mean you qualify for a higher income but must be declared at the start - even minor details like your height, weight or how much you drink or smoke. [Drewberry]

Many people assume they're in standard health and don't disclose conditions that would qualify them for an enhanced rate. Always declare everything. The provider will tell you if it makes no difference. It frequently does.

• Missing a guaranteed annuity rate

If you started your pension in the 1980s or 1990s, ask your provider to confirm whether you have a guaranteed annuity rate written into your contract. If you do, you'll be able to get a much more generous annuity rate compared to what's on offer from the rest of the market. [Pensionssharedservice]

Guaranteed annuity rates from older pension policies are among the most valuable financial assets some people hold. They can be double or more the current open market rate. They are surrendered permanently if you transfer the pension to a new provider. Always check before transferring any old pension.

• Choosing the wrong type for your circumstances

A level annuity that looks generous now may be inadequate in twenty years. A single life annuity that maximises income today leaves a surviving partner with nothing. The wrong type of annuity - however well priced - can create serious financial problems later.

The type of annuity should be chosen to fit your actual circumstances, not to maximise the headline income figure.

Buying too early

The older you are when you buy an annuity, the better the rate - because the insurer expects to pay out for fewer years. [Legal and General] Buying at 58 locks in a lower rate than buying at 65 or 70. For early retirees, a hybrid approach - drawdown during the bridge years, annuity purchase at a later age - often produces better overall lifetime income than buying an annuity immediately on stopping work.

 

Who an annuity is most likely to suit

Being direct about this is more useful than hedging.

An annuity is most likely to make sense if you have health conditions that qualify for enhanced rates, want a guaranteed income floor to cover essential costs regardless of market performance, are in your mid to late sixties or older where rates are more generous, don't have dependants who need capital passed on, and find the active management of drawdown stressful or unappealing.

It is less likely to make sense if you're in good health and early retirement with decades ahead, have strong other guaranteed income sources already, need capital flexibility for care or other large costs, want to preserve wealth for heirs, or are considering buying before age 65 when rates are significantly less attractive.

For most early retirees the answer is neither annuity nor drawdown exclusively. A mix and match strategy makes the most of both options. Part of your pension could be used to secure an annuity which covers your essential bills and living costs. Then you could move the rest into drawdown to provide a flexible income as and when you need it. [Drewberry]

 

Questions to ask any annuity provider

Before committing to any annuity, get clear answers to all of these.

• What is your open market rate? Not just this provider's rate but how it compares across the whole market. Use the MoneyHelper annuity comparison tool alongside any provider quote.
• Do I qualify for an enhanced annuity? Ask explicitly, even if you feel healthy. Describe your health history, lifestyle, smoking status, weight and any medication in full.
• Do you have a guaranteed annuity rate on this policy? Ask this of every old pension provider before any transfer decision.
• What happens if I die shortly after purchase? Ask for the specific terms on death benefits and whether a guaranteed period or value protection can be added.
• Is this a level or escalating income? If level - model what the income will be worth in real terms in twenty years at 3% inflation. If escalating - understand the lower starting income and how long before the escalating version overtakes the level one.
• Is this single or joint life? If you have a partner who depends on this income, a single life annuity is rarely the right choice regardless of the better rate.
• What are the payment terms? Monthly, quarterly, annually? In advance or arrears? These affect the practical cash flow of retirement income.
• Is the provider financially secure? Annuity payments are guaranteed by the insurer, not the government. Check the provider's financial strength rating. The FCA consumer guidance on annuities explains your protections under the Financial Services Compensation Scheme if a provider fails.

 

The FreeBefore65 take

I'm not buying an annuity yet. At 58, with a plan to leave the pension untouched until 65, the annuity question is several years away for me.

But I'm watching the rate environment with genuine interest. The improvement in rates over the last three years is material. The April 2027 IHT change removes one of the traditional arguments for preserving capital in draw-down. And the honest acknowledgement that I will eventually need to decide how much of the pension to annuitise - if any - means this is a decision worth understanding clearly now rather than rushing at 65.

My current thinking is a hybrid approach. Use draw-down during the bridge years and into the early part of pension access at 65. Then consider a partial annuity purchase in my late sixties or early seventies - when rates are better and the guaranteed income floor is more valuable. Enough to cover essential costs alongside the State Pension. Draw-down for the flexible layer on top.

That thinking will be part of the IFA conversation I need to have before April 2027.

 

Where to find out more

For impartial, free guidance on annuity options: Pension Wise at moneyhelper.org.uk - free for anyone over 50, government-backed, no commercial agenda.

For current rate comparisons: MoneyHelper annuity tool - independent, non-commercial.

For regulated independent advice on the annuity versus drawdown decision: MoneyHelper guide to choosing a financial adviser.

For FCA consumer guidance on annuities and your protections: fca.org.uk/consumers/annuities.

 

Tony writes about his personal journey to early retirement at freebefore65.co.uk. He is not a financial adviser. All content reflects his own experience and research and should be taken as a starting point for your own thinking, not as professional advice. Always take regulated independent advice before making annuity or drawdown decisions - the annuity purchase is irreversible and professional guidance is genuinely worth the cost.