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Many savers will assume that money used to buy an annuity will be lost entirely when the policyholder dies, but this doesn’t have to be the case.
A value-protected annuity ensures that cash spent on an annuity is not forfeited, even in the event of an early death.
Here, Which? outlines how value protection works and why it can represent a good deal.
Purchasing an annuity involves swapping your pension savings at retirement for a guaranteed regular income that will last for the rest of your life.
Annuities are often portrayed as a bet you can only win if you live a long time, but that’s not always true.
A value protection option, which is often overlooked by savers, involves ring-fencing or preserving a proportion of the amount you paid for your annuity (usually 50% or 100%) to return as a lump sum to your beneficiaries when you die.
If you select a value-protected annuity, you’ll receive income for as long as you live. Should you die before receiving the full amount used to buy the annuity, your beneficiaries will get a lump sum equal to the initial protected sum minus the total of payments already made.
Adding value protection isn’t expensive, although it will cost you more the older you are when you take an annuity out.
Figures from annuity provider Just Group show that a healthy 65-year-old using a £100,000 pension pot to buy an annuity can generate about £7,172 income a year from an annuity that includes 100% value protection (compared to £7,559 a year without value protection)..
In the event of death five years after purchase in this scenario, the annuitant would have received £35,860 in total in payments, leaving £64,140 to be returned to beneficiaries.
One word of caution - when unused pensions become subject to the inheritance tax (IHT) in April 2027, value protection lump sums will be included in the estate.
Speak to HUB Financial Solutions to help you compare the options available across the whole market.
Find out moreIf you take out an annuity as a result of using the service from HUB Financial Solutions, Which? will earn a commission to help fund its not-for-profit mission.
Interest in different types of annuities has increased as more people are again considering guaranteed income as part of their retirement planning.
Rises in the Bank of England base rate since 2021 have seen annuity rates hit a 16-year high of just under 8% for a healthy 65-year-old over the last year or so.
Providers take into account the broader economic picture, as well as your personal circumstances (e.g your age, health and size of your pension fund), when deciding on your annuity rate.
Pension companies 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.
Despite four interest rate cuts in 2025, other global factors, such as stubborn inflation and governments issuing more debt, have kept gilt yields high. The war in the Middle East is likely to lead to interest rate hikes in 2026 and the continuation of attractive annuity rates.
The type of annuity you choose will determine how much income you get and what happens to payments when you die. Here are three annuity options you might not know about:
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 will not reduce the income level significantly.
A healthy couple aged 65 would receive £7,259 a year with a 10-year guarantee, compared to £7,323 without one, on a joint-life annuity (paying 50% to the surviving spouse in both examples).
Payments from guaranteed annuities will also count as part of your estate for IHT purposes from April 2027.
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 a fixed percentage or in line with inflation, as opposed to level annuities, where payments are fixed, will protect against the erosion of income over time.
Data from the Association of British Insurers (ABI) show that the number of escalating annuities sold rose by 10% to just over 18,000 in 2025.
It's worth bearing in mind that opting for an escalating annuity means accepting a lower level of income at the outset, and it could take as long as 15 to 20 years for the overall income you've received to exceed what you would have got from a level annuity.
A so-called ‘enhanced’ annuity might be suitable for you if you're in poor health, smoke or are overweight. They will pay out a higher income based on a shorter life expectancy.
Quotes run by Which? Money in 2025 for a 65-year-old in relatively poor health, with a £100,000 pension pot, showed an enhanced annuity paid between 6% and 15% more than a standard annuity.
The calculations were for an overweight smoker who is taking medication for high blood pressure and high cholesterol.
It's important, therefore, not only to shop around for the best annuity rate, but also to declare any health conditions to your provider.
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