Retirees are using more of their savings to buy an annuity – should you?

The average pot size used to buy an annuity has soared by 160% over the past four years.

This coincides with a big improvement in annuity rates, which remain at near-record highs. 

Here we look at how much you can expect to get from an annuity and how to secure the best rate. 

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Annuity rates at near-record levels

Data from investment platform Hargreaves Lansdown shows that in the first six months of 2025, the average annuity purchase size was £162,729.

This represents a 160% increase from an average of £62,301 in the first six months of 2021.

During this time, annuity rates have risen sharply thanks to soaring interest rates and high gilt yields. The recent decisions from the Bank of England to cut interest rates have not significantly reduced the incomes on offer.

A 65-year-old with a £100,000 pension can now get up to £7,793 a year from a single-life level annuity with a five-year guarantee (ie it will pay out for five years, even if you die before then); in August 2021, the equivalent figure was £4,943.

Figures from the Association of British Insurers (ABI) show annuity sales reached a 10-year high in 2024. The total value reached £7bn – an increase of 34% on 2023.

• Find out more: best annuity rates

How annuities work

Choosing an annuity involves swapping some or all of your pension savings for a guaranteed income for the rest of your life. Separate research from Hargreaves Lansdown shows that 39% of people say guaranteed income is their main priority in retirement. 

Exactly how much you'll receive in return for your pension savings depends on the rate offered by the annuity provider you choose. 

When pricing annuities, providers consider the broader economic picture and your personal circumstances (for example, your age, location and health). You'll typically get a higher income if declaring a medical condition that could affect your life expectancy.

Buying an annuity is one of several options for people with a defined contribution pension. There are other ways to access your retirement savings, including pension drawdown and cashing in an entire pot. 

• Find out more: what are annuities?

Why it pays to shop around

Shopping around for an annuity is essential to get the highest possible retirement income. There are currently only six companies offering annuities to new customers, which makes this task simpler.

Opting for the first quote you get could mean you end up missing out on thousands of pounds over the course of your retirement. 

Taking the average amount used to purchase an annuity this year (£162,729), the best annual payout you can get for a single-life level annuity as a healthy 65-year-old is £12,815; the lowest is £11,601.

This adds up to a difference of £24,280 over the course of a 20-year retirement. 

• Find out more: shop around for the best annuity rates

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What to consider before you buy an annuity

Doing your research before buying an annuity is important for another reason. Once bought, an annuity cannot be unwound and so you need to consider your requirements very carefully. 

If you are married or in a civil partnership you may decide to opt for a joint, rather than single-life annuity so your partner is taken care of if you die first. 

This will pay out a proportion of the payments you were receiving to your surviving spouse – usually half or two thirds.

Taking out a joint-life annuity (paying 50% to the surviving spouse) at age 65 with a pot worth £162,729 would produce a maximum initial income of £12,257. 

You also need to consider the impact of inflation over the long term. It's possible to buy an inflation-linked annuity, where payments rise over time, but starting incomes tend to be much lower than for 'level' annuities, which pay a fixed amount.

A healthy 65-year-old can receive an initial sum of £8,880 per year from a £162,729 pension if they choose a single-life annuity that increases by 3% annually (vs £12,815 for a level annuity). 

• Find out more: the pros and cons of annuities

When to buy an annuity

You have to be at least 55 to access your pension, but otherwise it's entirely up to you when you buy an annuity.

You could choose to annuitise in segments throughout retirement and keep a portion of your pension invested through drawdown, where it has the potential to grow and keep up with inflation. It’s not a binary choice. 

It may be that you decide to start off keeping all your savings in a drawdown plan and then buy an annuity later in retirement. 

You'll generally find that the older you are when you arrange an annuity, the higher the annuity rate you'll get, reflecting the fact that the annuity provider won't have to pay out for as long.

However you choose to access your pension, you can take the first 25% as a tax-free lump sum. The rest will be added to your income for the year and taxed accordingly.

• Find out more: options for cashing in your pensions