For many people, retirement income planning is one of the most important financial decisions they will make. It’s not just about how much you’ve saved; it’s about making sure those savings last for the rest of your life.
An annuity is one way to turn your pension pot into a reliable, predictable income. Once purchased, it pays you a fixed, agreed amount at regular intervals and for many, that certainty is worth its weight in gold.
At Tees, we help you understand exactly how annuities work, whether they’re right for you, and how they might fit alongside other retirement income options such as drawdown.
Benefits of annuity v benefits of drawdown
Annuity
Income is guaranteed.
No investment risk.
You can’t run out of money.
Drawdown
Flexible withdrawals.
Potential for investment growth.
Risk that your pot could be depleted.
Many people choose a blended approach, using an annuity to cover essential living costs, and drawdown for discretionary spending.
How annuities work in the UK
To buy an annuity, you use money from your personal pension pot. You can:
- Take up to 25% tax-free before purchase.
- Choose lifetime or fixed-term payments.
- Select single life (just for you) or joint life (continues to a partner).
- Add inflation-linking or a fixed yearly increase to help maintain purchasing power.
- Once set up, the insurer will pay your chosen income until the term ends, or for life.
- Guaranteed period – income continues for a minimum set time, even if you pass away.
Types of annuities
- Lifetime annuity – income for as long as you live.
- Fixed-term annuity – income for a set period, with or without a lump sum at the end.
- Escalating annuity – payments that rise each year, by a fixed rate or in line with inflation.
- Joint life annuity – continues to pay your spouse or partner after you die.
Who might benefit from an annuity?
You might consider an annuity if you:
- Want secure, predictable income.
- Don’t want to manage investments.
- Are in good health (you could receive a higher rate through an enhanced annuity).
- Worry about outliving your savings.
- Value simplicity over flexibility.
Enhanced annuities – more income if you qualify
If you have certain health conditions or lifestyle factors such as smoking, diabetes, or high blood pressure, you could receive up to 40% more income. This is because your life expectancy may be shorter, so the insurer can offer higher payments. Full disclosure of your health and lifestyle is essential.
Addressing common concerns
“Annuities are poor value”
Rates vary with age, interest rates, gilts yields and product features. For some, especially those in good health, an annuity can be excellent value.
“I lose access to my money”
Once purchased, you can’t take the lump sum back. However, the trade-off is guaranteed security for life.
“Rates are low”
Annuity rates move with long-term interest rates and generally improve with age. Shopping around is essential to secure the best deal.
Tax considerations
- The first 25% of your pension pot can usually be taken tax-free.
- The remaining 75% used to buy the annuity is taxed as income under PAYE.
- No National Insurance is payable on retirement income.
Getting the best deal
- Compare rates from multiple providers, don’t accept your pension scheme’s first offer.
- Use the Open Market Option to find competitive rates.
- Check if you qualify for an enhanced annuity.
- Seek advice from an independent financial adviser.
Case study – Anne’s story
Anne is 65 with a pension pot of £600,000. She takes £150,000 as a tax-free lump sum. With the remaining £450,000, she buys a level lifetime annuity paying around £2,625 per month for life. She now has a predictable income, no investment concerns, and the reassurance that her payments will never stop.
Summary – the benefits of buying an annuity
- Peace of mind – your income is guaranteed for life, or fixed term.
- Certainty – predictable cash flow makes budgeting easier.
- No market risk – unaffected by stock market changes.
- Simplicity – no ongoing management required.
- Supports estate planning – particularly important with changes from April 2027.
Your next steps
- Find out the value of your pension pot.
- Decide how much income you need and for how long.
- Compare annuity rates and features.
- Consider enhanced annuities if eligible.
- Speak to an independent financial adviser for personalised advice.
We’ve helped many clients retire earlier than expected, or with more confidence than they thought possible. But what makes the difference isn’t how much you’ve saved; it’s how soon you start looking at the full picture.
If you’d like to understand your retirement readiness and get a clear, realistic view of your options, we’re here to help.
All financial services provided by Tees Wealth are regulated by the Financial Conduct Authority.
This material is for informational purposes only and does not constitute an offer or solicitation for the purchase or sale of any financial instrument. It is not intended as accounting, legal, tax, or investment advice. The information provided is correct at the time of writing.
Tees is a trading name of Tees Financial Limited, authorised and regulated by the Financial Conduct Authority (FCA), Registered number 211314, and registered in England and Wales (Company number 4342506).
