State pensioners aged 70 and over can receive an average of £8,765 per year on top of their state pension by purchasing an annuity, according to data from SharingPensions.co.uk. This additional income comes from converting a private pension pot into a guaranteed annual payout for life.
What Are Annuities?
An annuity is a financial product that pensioners can buy using their private pension savings, typically built up through employment. It converts a lump sum into a guaranteed annual income paid until death. LV, a life insurance firm, explains: “A pension annuity is a lifetime annuity you can buy using the money from your pension pot. It will pay you an income for the rest of your life. To be able to receive a pension annuity, you must be at least 55 years old and have at least £2,000 to invest after you’ve taken any tax-free cash.”
How Annuity Payments Are Calculated
Annuities keep the invested money growing while factoring in life expectancy and the amount contributed. Similar to life insurance, annuities assess age, lifestyle, and health to determine annual payouts. Based on current rates and assuming a pension pot of £133,000 before tax, retirees aged 70 and over can expect an average annual payment of £8,765.
Current Market Conditions
Colin Thorburn, founder of SharingPensions.co.uk, notes that annuity rates are at an 18-year high, making this a favourable time for retirees. He said: “Annuity rates are at an 18-year high increasing up to 118% for certain ages and annuity features since the recent low in December 2021. Annuities are currently higher as gilt yields reached an over 20 year peak of 5.60% on 15 May 2026.”
Considerations and Downsides
LV cautions that annuities have drawbacks. Payments are subject to income tax and may affect state benefits. Once purchased, an annuity cannot be changed or surrendered. LV adds: “The pension annuity cannot be cashed in or surrendered at any time. Purchasing a pension annuity is a once and for all decision. The options you select when you buy the annuity cannot be changed later on. Annuity payments are classed as income and are subject to income tax, and could affect any state benefits you claim – it is worth seeking advice from a financial professional to see what income tax you may be liable for. Depending on how long you live, you may receive less than you paid for your annuity. Ensure you outline any medical conditions you or your partner have as it may mean you receive a higher annuity income.”
