Annuity
A financial product that converts your pension pot into a guaranteed income for life. Once purchased, it cannot be reversed.
An annuity is bought from an insurance company using some or all of your pension pot. In return, the insurer pays you a fixed income every month for the rest of your life, no matter how long you live. The main types are: single life (pays only to you), joint life (continues paying your partner after you die, usually at 50-67% of the rate), level (fixed amount forever), and escalating/RPI-linked (increases with inflation but starts lower).
Annuity rates depend on your age, health, interest rates, and the type chosen. Enhanced annuities for smokers or those with health conditions can pay 20-40% more. The main alternative to an annuity is drawdown, where you keep the pot invested and withdraw as needed.
A £200,000 annuity purchase at age 65 scales to £16,162/year before tax from HL’s 10 September 2026 single-life level, no-guarantee example. This is proportional to a £100,000 quote, paid monthly in advance, not a personal offer. Taking tax-free cash first reduces the purchase amount.
Estimates use 2026/27 tax rates. Scottish taxpayers are subject to different income tax rates and bands. The calculations assume your salary is your only source of income and do not account for benefits in kind or other taxable income.