How Do Annuities Work? A Simple UK Guide for Retirees
Published 15 November 2026 · Pensions
Try it nowAnnuity Calculator UK →An annuity converts part or all of your pension pot into a guaranteed income, usually for the rest of your life. Estimate yours with the annuity calculator UK.
The basics
- You usually take up to 25% of your pot tax-free first.
- The rest buys an annuity at a rate – for example 7% means £7,000 a year per £100,000.
- The income is taxed like a salary.
What affects your rate?
- Age: the older you are, the higher the rate.
- Health: smokers and people with conditions like diabetes may get an enhanced annuity paying more.
- Options: inflation-linking, a spouse’s pension and guarantee periods all lower the starting income.
- Interest rates: annuity rates rise when gilt yields rise.
Annuity vs drawdown
| Annuity | Drawdown | |
|---|---|---|
| Income | Guaranteed | Flexible, can run out |
| Investment risk | None | Yours |
| Leave money to family | Limited | Yes |
Many people combine both: an annuity to cover essential bills, drawdown for extras.
Always shop around
You do not have to buy from your pension provider. The open market can pay noticeably more. Free guidance is available from Pension Wise for people over 50.
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15 Nov 2026