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When you turn your retirement savings into a regular income by buying an annuity, the assumption is that this income will be lost when you die, but this doesn’t have to be the case.
A value-protected annuity ensures that the cash you've spent on it isn't forfeited, even if you die soon after buying it. Yet they represent only a small proportion of annuities sold each year.
Here, we look at how value protection works and how it compares with other types of annuity.
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Purchasing an annuity involves swapping your pension savings at retirement for a guaranteed regular income that will last for the rest of your life.
David Cooper, director of annuity provider Just Group, said: 'Annuities are often portrayed as a bet you can only win if you live a long time, but they offer more options than many people expect and can address all the "what ifs" of retirement.'
A value-protection annuity involves ringfencing 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.
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 out an annuity.
Figures from annuity provider Just Group – which describes value protection as the 'best kept secret' in retirement planning – show that a healthy 65-year-old using a £100,000 pension pot to buy an annuity can generate about £7,172 a year from one that includes 100% value protection (compared with £7,559 a year without value protection).
In this scenario, if you were to die five years after buying the annuity, you would have received £35,860 in total in payments, leaving £64,140 to be returned to beneficiaries.
The table below shows how the cost of value protection varies by age.
| Annual annuity income | Age 60 | Age 65 | Age 70 |
| No value protection | £6,897 | £7,559 | £8,456 |
| 100% value protection | £6,629 | £7,172 | £7,745 |
| Reduction per year | -£268 | -£387 | -£711 |
Source: Just Group. Quotes based on a single-life level annuity, correct at 16 March 2026
It's worth bearing in mind that when unused pensions are brought within the scope of inheritance tax in April 2027, value-protection lump sums will be included in the estate.
Over the past year or so, annuity rates have hit a 16-year high of just under 8% for a healthy 65-year-old.
Providers take into account the broader economic picture, as well as your personal circumstances (such as 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, meaning annuity rates are expected to climb further.
The type of annuity you choose will determine how much income you get and what happens to payments when you die. Here are three 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 significantly reduce the income level.
A healthy couple aged 65 could receive £7,259 a year with a 10-year guarantee, compared with £7,323 without one, when buying a joint-life annuity that pays 50% to the surviving spouse.
When deciding which annuity to choose, you'll need to think about whether you want to mitigate against inflation.
Sales of escalating annuities rose by 10% to just over 18,000 in 2025, according to data from the Association of British Insurers (ABI).
Level annuities, where payments are fixed year after year, remain the more popular option. But 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. 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.
If you're in poor health, you smoke or are overweight, you might qualify for an enhanced annuity. This will pay out a higher income to reflect your shorter life expectancy.
When we ran quotes for an overweight 65-year-old smoker taking medication for high blood pressure and high cholesterol, the rates offered were between 6% and 15% more than a standard annuity (based on a £100,000 pension).
This makes it important not only to shop around for the best annuity rate, but also to declare any health conditions to your provider.
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