Pension Annuity Rates In The UK

How To Find The Best Annuity Rates In The UK

A pension annuity converts your pension savings into a guaranteed retirement income for life.

One way to consider it might be as an insurance policy for the later stages of your life, using the savings from your pension pot. The income from an annuity is guaranteed to be paid for the rest of your life, providing financial security in retirement.

This article will cover everything you need to know about pension annuities, answering the following key questions:

  •       What is a pension annuity – we cover what an annuity is
  •       What is the difference between a pension and an annuity
  •      What are pension annuity rates
  •       What are the best pension annuity rates
  •       Where can I find a pension annuity rate calculator
  •       Who are the leading pension annuity providers in the UK – who are the best providers to go to, and what are they offering

Topics that you will find covered on this page

Understanding Pension Annuity Basics

A pension annuity works as a financial agreement between yourself and an annuity provider. 

You pay them via either a series of payments or a lump sum, and in return, they provide you with regular income payments. These payments can be a fixed amount or can increase over time, depending on the type of annuity you choose.

The income you receive from this pension annuity will depend on various factors. These include the size of your pension pot, current annuity rates, lifestyle factors, and medical conditions, potentially leading to a higher income if you qualify for an enhanced annuity.

When choosing a pension annuity, shopping around and comparing annuity rates is important. 

The best annuity rates in the UK will depend on several factors, including the current state of the economy, interest rates, and the provider’s terms and conditions. It may be useful to find a pension annuity calculator, quickly estimating how much your rate should be. 

Lastly, it’s worth noting that the decision is usually irreversible once you’ve purchased a pension annuity. It is important, then, to consider this carefully and contact a financial advisor, depending on whether this suits your individual circumstances. This makes the process of buying an annuity a significant event in your life, determining your income for the rest of your life.

Types of Pension Annuities in the UK

There are several types of pension annuities available in the UK. 

Lifetime Annuity

A lifetime annuity provides an income which is guaranteed until death. This is the most popular type of pension annuity in the UK, offering secure regular payments no matter the lifespan.

Fixed Term Annuity

A fixed-term annuity is another option, providing a guaranteed income for a set number of years. At the end of the term, you will receive a maturity amount which you can then reevaluate and assess your options. For instance, this may be investing or buying another retirement product. 

Although it offers more flexibility, it also comes with the risk that your income could decrease if annuity rates go down when you’re looking to buy another product.

Escalating / Increasing  Annuity

An escalating annuity provides an income that increases yearly, either by a fixed percentage or in line with inflation. 

This can help to protect your spending power against the rising cost of living. Initial income payments are likely to be lower than those from a level annuity, which is something to consider when choosing between pension options. 

Level Annuity

This pays the same amount of income each year for the rest of your life.  Over time, inflation will erode its value, as £1,000 today is worth less than£1,000 in 10 years’ time.

Enhanced Annuity

Depending on your lifestyle or health conditions, it might be worth considering an enhanced annuity. This offers a higher income if an individual’s lifestyle or poor health could shorten their life expectancy. 

Smoking, being overweight or having a history of medical conditions are examples of this. It’s, therefore, necessary and important to provide your annuity provider with all relevant health and lifestyle information to ensure you find the best annuity rates.

An annuity purchase case study

Here is a rewritten UK version with a focus on a joint life escalating annuity:

John Smith, 65, and his wife Mary, 63, are approaching retirement and want a guaranteed income to supplement John’s company pension. With £400,000 in pension savings and following a consultation with an independent financial adviser, they use £150,000 to buy a joint life escalating annuity.

John and Mary are approaching retirement age and want to ensure they have a stable income during their retirement years. They have £400,000 in their pension savings. John’s company pension will provide £1,600 per month, but they want additional guaranteed income.

After consulting an independent financial adviser, John and Mary decide to use £150,000 of their pension pot to purchase a joint life escalating annuity. 

The annuity will provide them with £800 per month of guaranteed income for life, escalating by 3% each year to help offset inflation. This is based on annuity rates in 2023. Payments will continue as long as either of them are living.

The annuity provides them with a reliable increasing income which supplements John’s pension for regular living expenses.

A joint life escalating annuity offers several benefits, including:

  • Longevity protection: The annuity will continue to pay out for as long as either John or Mary is alive. This ensures that they will not outlive their savings.
  • Rising income security: The annuity payments will increase each year to help offset inflation. This means that John and Mary’s income will keep up with the rising cost of living.
  • Peace of mind: John and Mary can rest assured knowing that their partner will continue to receive an income after their death.

Their remaining £250,000 pension grows over time and stays invested as a rainy day fund.

The annuity provides John and Mary with peace of mind. 

Although buying the annuity secures dependable lifetime income to supplement John’s pension, their remaining assets stay invested for potential growth. This balanced strategy helps to decrease risks such as outliving savings, inflation, and market volatility.

Comparing annuity rates

To find the best annuity rates, use annuity comparison services like MoneyHelper.

How to Purchase a Pension Annuity

Purchasing an annuity is a significant decision where thoughtful planning is required. Consequently, sourcing financial advice can be very valuable for understanding your options and the process.

Therefore, many people choose to use the services of a financial adviser to help them navigate the process. Their expertise can be invaluable in helping you to understand the different types of annuities, the best annuity providers, and the current annuity rates.

Once you pick an annuity type, share details on your pension, health, and lifestyle with providers to receive annuity quotes. Finding the most suitable deals involves comparing rates across providers.

This is because the pension provider you’ve built your pension pot with may not necessarily offer you the best annuity rate. You may also want to find out whether a guaranteed annuity rate (GAR) is offered as part of the pension plan. If so, the provider will guarantee to pay a particular rate on your annuity if you choose to take annuity with them.

annuity rates uk

Tax Implications of Pension Annuities

When you receive income from a pension annuity, it’s important to understand the tax rules. 

For instance, annuity income is taxed as regular income. This is because it is based on your total taxable income for the year from all sources.

Fortunately not all of your pension pot has to be taxed. You can typically take up to 25% of your pension pot as tax free cash before you buy an annuity. However, the remaining 75% you use to purchase your annuity will be taxed as you receive the taxable income.

The tax treatment of pension annuities is fairly complex, so consider speaking to a financial or tax advisor about the process.

Role of Inflation in Pension Annuities

Another influence on your pension annuity is inflation. It can erode the buying power of your income over time, particularly if you have a level annuity, which pays the same amount each year. For some people this is significant and so it is worth buying an escalating annuity, increasing yearly in line with inflation or at a fixed rate.

Whilst this may be beneficial, you should also consider the effect of the typically lower initial income. This comes with an enhanced annuity, compared to level annuities. The income can take many years to catch up, therefore taking years to exceed the income you’d have received with a level annuity. 

Whichever pension annuity you choose, inflation is a factor that is necessary to consider when planning your retirement income. A financial adviser can help you to understand how inflation might affect your future income, supporting you to make an informed decision.

"Utilising comparison and review websites can facilitate the search for the very best deal among providers of pension annuities. "

Joint and Single Life Pension Annuities

When you buy a pension annuity, you will need to decide whether you want it to provide an income just for you or your partner or spouse. This is the difference between a single and joint life annuity.

Single Life

If you choose a single life annuity, the personal allowance will only be provided for your lifetime. 

When you die, the income stops. This type of annuity usually offers a higher income because it’s expected to be paid for a shorter period. 

Although there are additional policies, such as value protection and guaranteed term policies, which can extend your annuity to your next of kin, this is typically something which you need to buy on top of your annuity.

Joint Life

A joint life annuity, on the other hand, will continue to provide an income for your partner or spouse after you die. 

This choice may allow you to have peace of mind, knowing that your partner will continue to receive an income after your death. However, because a joint life annuity is expected to be paid for longer, the income is usually lower than that of a single life annuity.

Pension Annuity Rates in the UK

Pension annuity rates can vary widely between different providers and change over time. They’re influenced by several factors, including the Bank of England’s base rate, the provider’s business costs, and the average life expectancy.

To find a pension annuity which offers you the best annuity rate, it is a good idea to look around and compare offers from different providers. 

There are also several tools and calculators you can find online to help compare rates. These tools consider your age, health condition, lifestyle factors, and the size of your pension pot to provide a reasonably accurate estimate of the annuity rates you may get.

Alternatives to Annuities

Drawdown Pension

A drawdown pension allows you to take an income directly from your pension pot while the rest remains invested. You can adjust how much income you take each year to fit your needs. 

Any funds not withdrawn can continue growing tax-free, providing the potential for higher returns than annuities. However, the risk is you could run out of money if you draw too much or investments underperform.

Flexi-Access Drawdown 

With flexi-access drawdown, you can take up to 25% of your pension tax-free as a lump sum, then draw income from the remainder. 

There are no limits on how much income you can take. This flexibility allows you to tailor your income each year. But you need to carefully manage withdrawals to reduce risk of your pension running out.

Pension Fund Withdrawals

You can take lump sum withdrawals directly from your pension as needed. The first 25% is tax-free, while the remainder is taxed as income. This provides flexibility but lacks guarantees – once money is withdrawn, it no longer benefits from tax-free growth within the pension. 

Careful budgeting is needed to ensure the pension lasts.

Income Drawdown Funds 

Specialist drawdown funds are designed to provide an income in retirement. They remain invested while paying out regular withdrawals. This aims to provide income with potential for capital growth. Risks include sequencing risk if investments underperform early in retirement, depleting the fund faster than expected.

Lifetime ISAs

Lifetime ISAs allow retirement savings to grow tax-free. You can withdraw funds after age 60 to supplement retirement income. Either lump sum withdrawals or regular income can be taken. While not specifically designed for retirement income, LISAs provide an alternative way to save with tax benefits.

Risks and Rewards of Pension Annuities

Pension annuities can be advantageous due to the security that a guaranteed income for the rest of your life provides. They can also offer peace of mind, knowing that your income is secure no matter the financial market and fluctuating inflation.

Alternatively, there are risks associated with pension annuities, despite the guaranteed regular income. These should be considered before making the decision. 

One of the main risks is that if you die earlier than expected, you may not get the full value of your pension pot back. Some annuities offer a guarantee period, ensuring that the annuity will be paid out for a certain number of years, even if you die within that period.

Another risk is the effect of inflation, as mentioned before. If inflation increases substantially, it could erode the buying power of your annuity income.

Role of Pension Annuity Advisors

Given the complexity and long-term nature of the decision to buy a pension annuity, many people seek the help of a financial adviser. 

By consulting with a financial adviser, you can further understand the different types of annuities, the current annuity rates, and the best providers in the market.

A financial adviser can also enable you to fully consider all your retirement income options, such as pension drawdown, which could be a better choice for you. 

They can help you to understand the tax implications of buying an annuity and assist with the application process, making it as smooth as possible.

Although using a financial adviser will involve a fee, it is likely worthwhile due to their breadth and depth of knowledge. They will offer invaluable guidance, when considering the long-term nature of the decision to buy an annuity.

Annuity Calculator

As mentioned, an annuity calculator is a helpful tool to utilise, when considering a pension annuity. It can estimate the annuity income you could get based on age, the size of your pension pot, and your health and lifestyle factors.

However, it is best to remember that an annuity calculator can only provide an estimate, and that actual annuity rates vary between providers. It may be worth seeking financial advice and looking around to get multiple quotes from different providers. 

Buying a pension annuity is significant and will affect your income for the rest of your life. Therefore, it’s important to take your time, research, and seek professional advice.

Understanding Guaranteed Income for Life

One of the key benefits of a pension annuity is that it provides a guaranteed income for life. Regardless of how long you live, you will continue to receive income payments. This can provide peace of mind and financial security in your retirement years.

The value of this guaranteed income should be considered. It can provide a buffer against investment risk, as the income you receive is not dependent on the stock market’s performance or other investments. 

This is specifically important for individuals who wish to avoid exposing their retirement income to the volatility of the financial markets.

However, it’s worth noting that the value of your guaranteed income can be eroded by inflation, particularly if you have a level annuity which pays a fixed income each year. 

An escalating annuity, which increases yearly, can help to protect your income against inflation. However, these usually start with a lower income.

Impact of Health and Lifestyle on Annuity Rates

The annuity rate you are offered by annuity providers will likely vary significantly depending on your health and lifestyle. You may qualify for an enhanced annuity, if you have certain medical conditions or lifestyle factors that shorten your life expectancy. 

These provide higher annuity rates than standard annuities, so you would be able to receive a higher retirement income.

Enhanced annuities consider both medical conditions and lifestyle factors which may lead to medical issues, such as heart disease, diabetes and high blood pressure. Lifestyle factors which are considered include smoking and being overweight. To get the best and most accurate annuity, it is important to provide full information about your health and lifestyle.

Despite the benefits of enhanced annuities, such as the higher income, you should still compare rates between different providers. The criteria for enhanced annuities can vary between providers, so one provider might offer you a higher rate than another.

Future Planning with Pension Annuities

When planning your future with a pension annuity, it is necessary to understand your circumstances and needs as fully as possible.

This might involve considering the income you’ll need during retirement, whether you want to provide for both you and your partner, and if you want to provide for dependents after your death.

As they provide regular income, annuities can be a good option for those who are worried about running out of money in retirement, or having to manage their finances individually.

Alternatively, there may be better choices. If you are likely to have a shorter life expectancy or want the flexibility to leave a lump sum to your dependents, you may prefer to consider pension drawdown ,or other retirement income options outside of pension annuities.

It is always advised to seek help from professionals when considering these decisions, from needing to pay income tax to investment linked annuity. A financial adviser can support you to understand and clarify your options, making the best decision for your circumstances.


1. How can I find the annuities with the best rates?

Finding the annuities with the best rates often requires some research, varying between annuity types such as lifetime annuities or enhanced annuities. Annuity rates are not standardised and can have large variations between different pension providers. Therefore, it’s advisable to compare annuities from several providers to ensure you get the best rate. 

You can use online comparison tools to help with this, or you can seek the help of a financial adviser. They can guide you through the process and help you to understand the available rates.

2. Can I take a tax-free lump sum from my pension fund?

It is possible for people to take tax-free lump sums from their pension pots when reaching retirement age. However, it is typically no more than 25% of your pension pot under current pension rules in the UK. The remaining 75% can then be used to buy an annuity or invested in a drawdown scheme to provide an annual income.

It’s also worth noting that taking a large lump sum from your pension pot won’t just affect you pension wise. It could also potentially affect your entitlement to means-tested benefits. This means that it’s always a good idea to get financial advice before making any major decisions about your pension.

3. What impacts the income paid by an annuity?

The income paid by a pension annuity depends on several factors. These include the size of your pension pot, the annuity rates when you buy, and your life expectancy. Depending on the rate you buy, you may also be able to receive a better retirement income. 

You might qualify for an enhanced annuity if you have a medical condition or a lifestyle factor which could shorten your life expectancy, potentially providing a higher income than a standard annuity. Choosing a single or a joining annuity will also affect your annuity, as will choosing an escalating annuity.

4. How does the retail price index affect annuities?

The retail prices index (RPI) measures the inflation rate in the UK. It can affect annuities because some annuities, known as escalating annuities, increase each year in line with inflation. Alternatively, others, such as level annuities, remain the same year on year. 

Choosing an escalating annuity will mean your income increases annually by a fixed percentage or in line with the RPI. This can help to protect your income against the rising cost of living. As stated in the article above, it is worth noting that escalating annuities typically start with a lower income than level annuities. Furthermore, it takes a while for the income you receive via regular payments to catch up.

5. What is a fixed term annuity?

A fixed-term annuity is an annuity which guarantees your income for a specified period, instead of for life. This might allow a more flexible income over your retirement. At the end of the term, you’ll receive a maturity amount, which you can then use to buy another retirement product, or take as a lump sum.

Fixed term annuities can be a good choice, depending whether you want more flexibility and are comfortable with the risk that your income could decrease if annuity rates fall. It is always advised to seek professional advice here. This is in regard to how much income you may be able to receive, which pension pot to put or which annuity is best for you.

Meet the author

William Jackson

William is a leading writer for our site, specialising in both finance and health sectors.

With a keen analytical mind and an ability to break down complex topics, William delivers content that is both deeply informative and accessible. His dual expertise in finance and health allows him to provide a holistic perspective on topics, bridging the gap between numbers and wellbeing. As a trusted voice on the UK Care Guide site, William’s articles not only educate but inspire readers to make informed decisions in both their financial and health journeys. 

Review of Article

This article has been reviewed by Saq Hussain, who is a pension and financial expert, with over 25 years experience of the financial services industry. Saq has regualrly featured in the UK press commentating on financial and specifically pension and retirement related issues. 

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