Why annuity odds are now favouring retirees

Higher annuity rates mean that retirees can now expect to recoup their initial outlay significantly earlier. 

The break-even point is now seven years sooner than it was back in 2021.

Here, we look at what improved annuity rates mean for you and what your other options are for generating a retirement income.

Why are annuity customers breaking even sooner?

Research from Canada Life shows that today’s annuity rates have shortened the payback period – in other words, the point where the amount you've received in regular payments matches the initial amount you used to buy the annuity.

Higher annuity rates mean that the payback period is now 14 years on a £100,000 annuity purchased by a 65-year-old, generating an income of around £7,478 a year.

Those who bought an equivalent annuity in 2021 would have faced a 21-year wait to recoup the initial investment, as the annual income would have been considerably lower at £4,660 a year.

The calculations are based on a 65-year-old with no health or lifestyle factors buying a single-life annuity (where payments end when you die).

The latest figures from the Office for National Statistics show that a 65‑year‑old woman is expected to live for another 21 years and a 65‑year‑old man for another 19 years.

Based on current annuity rates, this means a 65-year-old woman could expect, on average, seven extra years of annuity payments after recovering the original investment, and a 65‑year‑old man could expect five extra years of payments.

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What's driven up annuity rates?

The improved break-even period is thanks to an increase in annuity rates. Over the past year or so, income levels have hit a 16-year high of just under 8% for a healthy 65-year-old.

Annuity rates have continued to increase in 2026, up by 1.5% in the first quarter of this year. 

When the base rate is high, the yield on gilts, which companies use to fund annuity income, tends to rise. This, in turn, pushes up the income you can expect to get from an annuity.

Global volatility is expected to lead to further interest rate hikes in 2026, meaning annuity rates are expected to climb further.

• Find out more: Best annuity rates 2026

The importance of shopping around

Once you've bought an annuity, the arrangement can't be unwound, so it’s important to get the right one for you.

Data from investment platform Hargreaves Lansdown shows that there's a £647 difference in the highest and lowest quotes for a 65-year-old with a £100,000 pension looking for a single-life, level annuity with a five-year guarantee (in other words, an annuity where payments remain at the same level and stop when you die – unless this is within the first five years, in which case payments will continue for this period).

Over the course of a 20-year retirement, the difference adds up to almost £13,000 more if you opt for the highest quote. 

Make sure you include as much information on your application as possible about your health, as you may qualify for an enhanced annuity, which offers a higher income.

• Find out more: different types of annuities explained

What are the alternatives to an annuity?

The Financial Conduct Authority’s Financial Lives survey shows that 75% of consumers aged over 45 do not have a clear plan for how to take money from their pension or didn’t know they had to make a choice.

Exchanging your pension savings for a regular income by buying an annuity is just one of several options for accessing your retirement savings, which you can do from the age of 55 (rising to 57 in 2028):

• Pension drawdown: this is where you keep some or all of your pension invested, and take an income as and when you wish. You can take out as much as you want, although this money will be subject to income tax, so you'll need to take that into account.

• Lump sums: you can leave the money in your pension and take out lump sums when you need to. The technical term for this is uncrystallised funds pension lump sums (UFPLS). This just means that you haven't 'crystallised' your pension pot by turning it into an income. With each lump sum you take, 25% will be tax-free and the rest is treated as income and taxed in the same way.

• Cash in an entire pension: You have the option to take all the money in your pension in one go. However, there are considerable tax implications to bear in mind before deciding to cash in your entire pot. The first 25% will be tax-free and the rest will be taxed in the same way as other income.

• Take a mix-and-match approach: Arranging an annuity (secure and guaranteed) alongside drawdown (flexible, with potential for investment growth) can give the best of both worlds. The guaranteed lifetime income from an annuity gives you peace of mind that you’ll be able to cover essentials, while drawdown allows you the flexibility to withdraw more money as you need.