Pensioners aged over 65 can secure an additional £7,953 on average each year through annuities, paid on top of their Department for Work and Pensions (DWP) state pension. Annuities are financial products that allow retirees to convert their private pension pot into a guaranteed annual income for life.
How Annuities Work
As explained by life insurance firm LV: “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.”
Annuities keep the invested money growing while balancing factors such as life expectancy and the amount contributed. Currently, the state pension age is 66 and is rising to 67 by April 2028.
Current Rates and Payouts
According to SharingPensions.co.uk, retirees aged 65 and over can get £7,953 per year from an annuity on average, based on current rates and assuming a pension pot of £133,000 before tax. SharingPensions founder Colin Thorburn noted that this is a golden period for annuities, which are at an 18-year high.
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 warns that annuities have some downsides. They are subject to tax, like the pension pot itself, and cannot be changed or surrendered later. The firm states: “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.”
Additionally, depending on how long you live, you may receive less than you paid for the annuity. LV advises: “Ensure you outline any medical conditions you or your partner have as it may mean you receive a higher annuity income.”
