17th October 2026
For years, annuities were regarded by many pension savers as an unattractive way to turn their retirement savings into income. Low interest rates meant relatively modest payouts, while pension freedoms gave people greater choice over how to use their money.
That picture has changed. Annuity rates have risen sharply and, by September 2026, had reached an 18-year high, according to consumer group Which?. For a healthy 65-year-old with a £100,000 pension pot, the best listed conventional annuity rate in October offered an income of about £8,237 a year before tax. That is roughly £686 a month. It is an illustration rather than a guaranteed offer, and the actual amount depends on the terms chosen and the individual's circumstances.
The improvement raises an important question for people approaching retirement: is this a good time to secure a guaranteed income for life? It also prompts a bigger question for younger workers. Should we be thinking about the income we will need in retirement much earlier, rather than concentrating mainly on the size of our pension pot?
Turning savings into a regular income
An annuity is relatively straightforward. A person uses some or all of their defined-contribution pension savings to buy a policy from an insurance company. In return, the insurer promises to pay a regular income, either for life or for an agreed period.
A lifetime annuity can provide valuable reassurance. The income continues for as long as the person lives, removing the risk of exhausting that particular pot through withdrawals or investment losses. This can be especially useful for people who want to cover essential living costs without constantly monitoring financial markets.
But there is a trade-off. Once a lifetime annuity has been purchased, the capital used to buy it generally cannot be recovered after the cooling-off period. A basic single-life annuity normally stops when the owner dies. Options are available to provide an income for a surviving partner, guarantee payments for a minimum period or protect some of the capital, but these features usually reduce the initial income.
Nor should an annuity rate of around 8% be confused with an 8% investment return. The payment reflects the insurer's assessment of life expectancy, investment returns and the cost of providing income for life. Part of the money paid out represents the economic return of the capital used to purchase the policy.
Is 65 the right age to decide?
For someone approaching 65 with a private pension pot, today's rates deserve attention. A guaranteed income can complement the State Pension and any workplace pension, reducing dependence on investments or withdrawals that may become difficult to sustain.
However, there is no single answer for everyone. Someone whose State Pension and other secure income already cover their essential spending may have less need to buy an annuity immediately. Someone with a modest pension pot may want to retain flexibility to meet unexpected expenses. Others may prefer to keep their money invested, accepting the risks in exchange for the possibility of growth and continued access to their savings.
Health also matters. An insurer may offer a higher income to someone whose medical history or lifestyle indicates a shorter life expectancy. This is known as an enhanced annuity, and it is one reason why comparing providers can make a substantial difference.
Inflation is another consideration. A level annuity usually starts with a higher income, but that income buys less as prices rise. An annuity that increases each year, or rises with inflation, offers some protection against this problem but normally starts at a lower level.
The sensible approach is not to assume that the highest headline rate is automatically the best deal. People should compare different providers, check the terms carefully and consider how an annuity fits alongside their other retirement income.
Should younger people plan for annuities earlier?
The answer is yes, if that means planning for a dependable income in later life. But it does not mean that younger people should buy annuities decades before retirement.
For most younger workers, the priority is to build a pension fund through regular contributions over a long period. Workplace pensions, employer contributions and pension tax relief can all help. The money is generally invested, so its value can rise or fall, but starting early gives contributions more time to benefit from investment growth.
The annuity decision normally comes much later. When retirement approaches, the saver can decide whether to use some of the accumulated pension fund to buy guaranteed income, leave some invested and draw money as needed, or combine the two approaches.
That distinction is important because nobody knows what annuity rates will be in 20 or 30 years. Today's relatively attractive rates cannot simply be assumed to remain available. Equally, delaying retirement income decisions carries its own risks, particularly if markets fall just as someone plans to retire.
A better question for younger savers is not whether they should commit to an annuity now, but whether they understand what their pension contributions might eventually provide as a monthly income. A pension statement showing a large pot can look reassuring, yet the practical issue is how much money will be available to pay for food, heating, housing and everyday life.
A balance between security and flexibility
There is no need to treat annuities and pension drawdown as rival choices where one must always defeat the other. Some retirees may use an annuity to cover essential expenses and keep the remainder invested for flexibility. Others may value the certainty of a larger guaranteed income. The right balance depends on their circumstances, family commitments, health, other assets and attitude to risk.
The wider lesson is that retirement planning should focus on income as well as savings. People need to understand not only how much they have accumulated, but also how securely that money can support them over what could be a retirement lasting 25 or 30 years.
For those nearing 65, stronger annuity rates have made the option worth another look. For younger people, the message is more enduring: start building pension savings early, understand the income those savings may eventually provide, and leave the decision about buying an annuity until there is enough information to compare the options properly.
Annuities will not suit everyone. But guaranteed income has regained a place in the retirement conversation, and it is a conversation worth having before the day someone stops work.
Further information: MoneyHelper's free, impartial guidance explains the different annuity options and provides a comparison tool: https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/compare-annuities