Annuity payouts at record levels – should you consider one?

Annuity rates have reached an 18-year high over the past month or so, with the top rate for a healthy 65-year-old hitting 8%.

That means if you used a pension pot of £100,000 to buy an annuity, it would pay you £8,000 a year – hundreds of pounds more than if you had bought an annuity last year.

Exchanging your pension savings, or at least a portion of them, for guaranteed income is once again becoming popular.

Here, we outline why annuity rates are currently so attractive, and what to consider before opting for one to fund your retirement.

Payouts on the rise

Both Scottish Widows and Canada Life are currently quoting rates of more than 8% for a 65-year-old – they would pay out £8,155 a year and £8,120 a year, respectively.

Two years ago, the highest amount you could get was around £7,100 a year, while in February 2023 it was even lower, at £6,600.

An extra £1,400 a year will mean an overall difference of nearly £30,000 over the course of a 20-year retirement. 

A joint-life annuity (paying 50% of the original income to the surviving spouse) now produces an annual income of around £7,750.

You’ll get a higher annuity rate if you delay taking one out until you’re a bit older. That’s because the provider expects to make payments over a shorter period.

A healthy 70-year-old can get just over £9,000 a year in exchange for their £100,000 pension fund. 

• Find out more: best annuity rates 2026

How annuities work

Choosing an annuity to fund your retirement involves swapping your pension savings for a guaranteed regular income that will last for the rest of your life.

The payout you’ll receive depends on the annuity rate offered by the provider you choose (given as a percentage, for example 7% a year) and the amount you're converting into an annuity (your initial pension pot).

Companies consider the broader economic picture, as well as your personal circumstances, when deciding on your annuity rate. 

Providers typically fund the income from their annuity products using returns from government bonds (known as gilts), which are considered low-risk investments. When the base rate is high, gilt yields tend to go up, which in turn pushes up annuity rates.

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What has pushed up annuity rates?

Global factors, such as stubborn inflation and governments issuing more debt, have kept gilt yields high in 2026.

Annuities are usually priced in reference to 15-year gilt yields, which reached a 20-year peak of 5.7% at the start of September. 

In contrast, 15-year gilt yields were as low as 0.9% following the Brexit vote in 2016 and 0.2% in the wake of the March 2020 coronavirus lockdown.

The upward trend has also been driven by conflict between the US and Iran in the Middle East and uncertainty in the wake of the change in UK Prime Minister. This has led to a further boost to annuity rates.

With the Bank of England expected to raise interest rates in the months ahead, it's likely retirees will continue to be able to take advantage of competitive annuity deals.

• Find out more: what are annuities?

Choose the right annuity for you

Once you buy an annuity, it can't be reversed, so it pays to do your research to make sure you get the right one for you. 

There are different types to suit your circumstances and retirement needs. 

• Enhanced annuity: People in poor health, who smoke or who are overweight may be eligible for an enhanced annuity. This pays a higher income (between 6% and 15% more, based on previous quotes) because of your shorter life expectancy, so you should declare any health conditions at the outset.
• Joint-life annuity: Single-life annuities pay the highest incomes, but payments will stop when you die. A joint-life annuity will continue paying out to your spouse if you die first. This money will be free of inheritance tax. You can choose how much of the original payment is then paid to the surviving spouse, for example 100%, 75% or 50%. 
• Escalating or index-linked annuity: When deciding which annuity to choose, you'll need to think about whether you want to mitigate against inflation. Escalating annuities, where payments increase annually either by a fixed percentage or in line with inflation, will protect the value of your payments over time. The downside is that opting for an escalating annuity means accepting a lower level of income at the outset. 
• Guaranteed annuity: An annuity with a guarantee period means your retirement income will be paid out for a set number of years from the time you take out the policy, even if you die during this time. For example, if you take out an annuity with a 10-year guarantee period and die after three years, the payments would continue for seven more years. Adding a guarantee won't significantly reduce the income level.

Shop around for the very best rate

Shopping around is essential, as rates can vary significantly between providers.

If you want tailored recommendations on which type of retirement income to choose, consider getting advice from a regulated financial adviser. You can search for one using the comparison sites Unbiased or VouchedFor.

An independent annuity broking service, such as Age Partnership, HUB Financial Solutions or Retirement Line, can work on your behalf to find the best deal and most suitable product for your circumstances.

You can also get free guidance about your options from Pension Wise. This service, from government-backed MoneyHelper, offers face-to-face, telephone or online appointments to over-50s with a defined contribution pension.