Annuities in 2026: A New Era for Guaranteed Income

The story of annuities over the past decade is one of dramatic reversal. Between 2015 and 2021, annuity sales collapsed after the pension freedoms reforms gave DC pension holders the choice to avoid annuities entirely. Rates were at historic lows — a 65-year-old with £100,000 could buy perhaps £5,000/year of level income — and many retirees concluded that an annuity was a poor deal compared with the flexibility and upside potential of drawdown.

Then interest rates rose. The Bank of England's rate-hiking cycle from late 2021 through 2023 drove UK gilt yields — the primary driver of annuity pricing — to levels not seen since before the 2008 financial crisis. By 2023-2024, annuity rates for a 65-year-old had risen to £6,500-7,500 per £100,000 of pension pot, depending on the type of annuity and the individual's health profile. That represents a 30-50% improvement in annuity income from the 2020 low.

Annuities are no longer the embarrassing product that financial planners reluctantly mentioned after emphasising drawdown's advantages. They are, for many retirees, the most rational choice — or at least an important component of a well-structured retirement income plan.

Important: Annuity purchase is a one-way, irrevocable decision — once the income stream is secured, you cannot reverse it. The decision should be made carefully, with regulated financial advice, based on your specific health profile, financial circumstances, and income needs. This guide provides general information only and does not constitute advice.

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The Annuity Revival: What Changed

Annuity rates are fundamentally driven by the yield available on long-dated UK government gilts (gilts are the UK government's borrowing instruments). An insurance company selling a lifetime annuity is taking your pension pot today, promising to pay you an income for life, and investing the premium primarily in gilts to match the liability.

When the 10-year UK gilt yield was 1.5% (as it was in 2020-2021), the insurer could generate only modest returns on the premium, which meant the annuity income rate was low. When gilt yields rose to 4-5% (as they did from 2022-2024), the insurer could generate substantially higher returns, and annuity rates rose accordingly.

As of mid-2026, with UK gilt yields at approximately 4.2-4.5% (subject to market movements), annuity rates for a standard 65-year-old male remain significantly higher than they were during the 2020 era of near-zero interest rates.

Approximate annuity rates (2026, illustrative):

• 65-year-old male, £100,000, level, single-life: approximately £6,800-7,200/year
• 65-year-old female, £100,000, level, single-life: approximately £6,200-6,600/year (lower because women live longer on average)
• 65-year-old male, £100,000, joint life (50% spouse), level: approximately £6,000-6,400/year
• 65-year-old male, £100,000, level, single-life, enhanced (moderate health conditions): approximately £8,000-10,000/year

These figures are illustrative and change daily with market conditions. Always obtain a live quotation before making any decision.

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Understanding the Main Annuity Options

Annuity design involves a series of choices that significantly affect both the income level and the type of security the annuity provides. Higher income now almost always comes at the cost of lower income later or reduced security for dependants.

Level vs Escalating Annuities

Level annuity: Pays the same monetary amount every year for life. Cheapest in year one; falls in real terms with inflation over time. A £7,000/year level annuity in 2026 will still be £7,000/year in 2046 — but at 3% annual inflation, its purchasing power in 2046 is approximately £3,800 in 2026 terms.

RPI-linked or CPI-linked annuity: Increases each year in line with the Retail Prices Index or Consumer Prices Index. The starting income is typically 30-40% lower than a level annuity (because the insurer is pricing in the cost of future increases). The annuity only "catches up" with the level annuity after approximately 15-17 years in a 3% inflation environment.

Fixed escalation: Increases by a fixed percentage per year (typically 3% or 5%). More predictable than RPI-linking; starting income is between the level and RPI-linked rates.

The decision between level and escalating depends primarily on: your other income sources (if state pension and other DB income provide inflation protection, a level annuity may be acceptable); your health (shorter life expectancy favours taking the higher level rate); and your attitude to inflation risk.

Single-Life vs Joint-Life Annuities

Single-life: Pays income for your life only. On your death, all income ceases. Provides the highest initial income. Only appropriate for those with no financial dependants.

Joint-life (or last survivor) annuity: Continues to pay income to a named survivor (spouse, civil partner, or other dependant) after your death. The survivor receives a specified proportion of the original income — typically 50%, 66%, or 100%. The higher the survivor proportion, the lower the initial income.

For married couples or civil partners, a joint-life annuity is almost always more appropriate than single-life — the income reduction (typically 5-15% of the single-life rate, depending on the survivor proportion and the age gap between partners) is an insurance premium against the survivor being left without income.

The Guaranteed Period

A guaranteed period (also called a "minimum payment period") ensures the annuity pays for at least the specified number of years (typically 5 or 10) even if the policyholder dies before the period ends. If you die in year 3 of a 10-year guaranteed period, the remaining 7 years of income is paid to your estate or nominated beneficiary.

The cost of a 10-year guarantee is modest — typically a 2-5% reduction in the initial income. For those concerned about the "value for money" of an annuity given uncertainty about health and lifespan, a guaranteed period provides protection against the perceived downside of dying shortly after purchase.

Overlap with the PCLS

In most defined contribution pensions, you take your 25% tax-free PCLS first and use the remaining 75% to purchase the annuity (or go into drawdown). The annuity is purchased on the "crystallised" remaining fund.

Alternatively, an annuity can be purchased from an uncrystallised fund — the first 25% of each payment is then tax-free (a form of UFPLS structure). This is less common but available from some providers for those who want to manage the PCLS election carefully.

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Enhanced Annuities: The Most Underused Advantage

An enhanced annuity (also called an impaired life annuity) pays a higher income than a standard annuity to reflect a shorter-than-average life expectancy. The principle is straightforward: if the actuary concludes the policyholder is likely to die sooner than average, the insurance company needs to fund fewer years of income from the premium, and can therefore afford to pay more per year.

Enhanced annuities are commercially significant. For someone with a qualifying condition, the enhancement can be 20-50% above the standard rate — potentially adding £1,500-3,500/year to the income from a £100,000 pot.

Conditions that commonly qualify for enhancement:

• Smoking (any current or recent smoking history)
• Type 2 diabetes
• Hypertension / high blood pressure (controlled or uncontrolled)
• Cardiovascular disease or heart conditions (including history of heart attack or stroke)
• Cancer (any history, including in remission)
• Chronic kidney disease
• Respiratory conditions (COPD, severe asthma)
• Significant obesity (BMI 30+, with greater enhancement for higher BMI)

Almost any chronic condition that affects life expectancy may qualify. The application process requires disclosure of medical history on an application form; the insurer may request a report from your GP. Providing accurate and complete medical history is both ethically required and financially important — underdisclosure could result in the annuity being voidable.

The critical point: If you have any qualifying health condition, you must tell annuity providers. Not telling them means you will receive a standard rate that is materially lower than you are entitled to. Always get enhanced rate quotes alongside standard rate quotes.

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The Open Market Option: Never Buy from Your Pension Provider

By law (under the Financial Services and Markets Act and subsequent FCA rules), you have the right to take your pension and use it to buy an annuity from any insurer on the market — you do not have to buy from the company that holds your pension. This is the "Open Market Option" (OMO).

The price difference between accepting your pension provider's "internal" rate and shopping the open market can be 10-25% in income terms. For a £200,000 pot buying a £14,000/year annuity versus a £12,000/year internal quote, the OMO generates £2,000/year more income — over a 20-year retirement, that is £40,000 in additional income.

How to shop the open market:

• Use an annuity comparison service or broker (Hargreaves Lansdown annuity search; Legal & General's annuity shop; the Money and Pensions Service Retirement Calculator for an indicative comparison)
• Obtain quotes from all major providers (Aviva, Legal & General, Canada Life, Just Group, Pension Insurance Corporation, Standard Life, Zurich)
• Ensure you submit the same health and lifestyle information to all providers to enable accurate comparison
• The annuity market is an advised market for most practitioners — working with a regulated annuity specialist will ensure the OMO is fully exercised

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The Partial Annuity Strategy: Combining Security and Flexibility

Financial planners increasingly recommend a "barbell" or "floor-and-upside" approach to retirement income: using a portion of the pension to buy a guaranteed income (the floor), and keeping the remainder in drawdown (the flexibility).

The rationale is intuitive:

• The annuity portion covers essential, non-discretionary expenses (food, housing, utilities, healthcare) — the income you must have regardless of market performance
• The drawdown portion covers discretionary spending (travel, entertainment, gifts, home improvements) — expenditure that can flex with portfolio performance

Example: A 67-year-old with a £400,000 pension pot and a full new State Pension of around £12,550/year. Essential expenses: £24,000/year. The State Pension covers around £12,550; the individual needs to secure approximately £11,500/year additionally with certainty.

Strategy: Purchase an annuity with £160,000 (generating approximately £11,000-12,000/year) to cover the remainder of essential expenses alongside the state pension. Keep £240,000 in drawdown for flexible income, estate planning, and opportunity funds.

This approach:

• Eliminates longevity risk for essential income (the annuity pays for life, however long)
• Preserves investment upside for discretionary spending
• Reduces the consequences of a bad sequence of returns (essential income is not portfolio-dependent)
• Allows an annuity to be purchased at 67 (better rate than at 65) while maintaining flexibility

The partial annuity approach is particularly well-suited to those in good health who have significant discretionary spending aspirations alongside a core essential income need.

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Annuities for Expats and Non-UK Residents

UK nationals resident overseas can purchase lifetime annuities from UK providers, subject to:

• The relevant double taxation agreement (which may affect whether the income is taxed in the UK, the country of residence, or both)
• The provider's willingness to make payments to overseas bank accounts (most major insurers can, with appropriate documentation)
• Currency exposure (sterling income paid to a non-sterling country creates FX risk)

For those considering returning to the UK in later retirement, deferring annuity purchase until after return can simplify the tax position. Alternatively, a QROPS holder in a QROPS country may find the local pension system offers equivalent guaranteed income products.

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How Global Investments Can Help

At Global Investments, we work with clients approaching retirement — both in the UK and internationally — to evaluate whether and how an annuity fits their retirement income strategy.

We can help you access the open market, model partial annuity strategies, ensure your health history is properly disclosed to access any enhanced rate you may be entitled to, and integrate the annuity decision with your broader drawdown strategy and estate planning. Our advisers work with FCA-authorised annuity specialists for the formal quotation and purchase process.

Contact our team to discuss your annuity options.