How a lifetime annuity works
You hand a lump sum (for example, your pension pot or part of it) to an insurance company. In return, they pay you a fixed income for the rest of your life, regardless of how long you live. If you die quickly, the insurer wins; if you live to 100, you win. The monthly income is determined by your age at purchase, current interest rates (specifically gilt yields), your health status, and any additional features you add (such as inflation protection or spouse’s pension).
Annuity rates and the interest rate link
Annuity rates rise when long-term interest rates (gilt yields in the UK) rise, and fall when they fall. This is because insurers invest the lump sum you give them primarily in bonds — higher bond yields mean they can promise more income. Rates collapsed in the 2010s as yields hit historic lows, making annuities deeply unattractive. The sharp rise in interest rates in 2022–2023 dramatically improved annuity rates — a 65-year-old with £100,000 could buy roughly £5,000–£7,000 per year in 2024, compared to under £4,000 in 2020.
The case for and against
The main argument for annuities is certainty: you cannot outlive the income, you don’t have to manage investments, and a poor sequence of returns cannot devastate you. The main argument against: you lose control of the capital (it’s gone once converted), if you die early your estate loses out, and if inflation erodes the real value of a flat payment over 30 years, the purchasing power halves. Many retirees now use drawdown (staying invested) rather than annuitising, accepting more risk but retaining flexibility and inheritance potential.
“An annuity is the only asset that insures against the one risk we can’t predict — how long we live.”
What this means for you
Annuities are worth serious consideration if: you have no defined benefit (final salary) pension providing a guaranteed baseline income; you are worried about outliving your savings; or you are in poor health and qualify for enhanced rates. They are less appropriate for: those with significant guaranteed income already (State Pension plus defined benefit); those who die young in their family; or those with substantial assets who can self-insure longevity risk. Shop the entire market — rates vary significantly between providers. A financial adviser specialising in at-retirement planning is worth consulting for any decision of this size.