The Pros and Cons of Choosing an Annuity in the UK (June 2024)

The Pros and Cons of Choosing an Annuity in the UK (June 2024)
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Annuity rates in the UK are currently at historically high levels due to rising interest rates and gilt yields. This makes annuities a more attractive option for some retirees in 2024. However, it's still important to weigh the pros and cons before making a decision.

What is an annuity?

An annuity is a retirement product you can purchase with some or the entirety of your pension pot.

 When purchasing annuities, you are making an agreement with the annuity provider that they will pay you a regular retirement income either for the rest of your life or for a fixed period.

 The amount that you will receive in payouts is based on many factors but predominantly, your life expectancy, health and the amount you deposit, will determine this.

Types of Annuity

Lifetime annuities – These provide a fixed income for the rest of your life

Enhanced annuities– You may have to meet certain eligibility requirements for this type of annuity as these can pay out higher income

With profit annuities – The income received from this type of annuity is linked directly to how well the investment strategy of the annuity provider performs.

Deferred annuities – This product is also investment linked with the difference being that any funds are left untouched by the account holder until an agreed period of time has passed. During this time, referred to as the accumulation phase, any funds within the account are exempt from tax.

Factors that can affect the rate offered by an annuity provider include 

Health – Those with health issues can usually expect higher payments, especially if their health is likely to reduce their life expectancy.

Age – Annuity providers usually pay out higher rates for older buyers who may not be expected to live as long.

The amount of money deposited – Usually the more money put into the account, the higher the income.

The length of time the payments are guaranteed for – Some annuity buyers opt for shorter agreements and therefore larger payments whilst others prefer an agreement which pays out an income until they die.

How often do you receive income from an annuity?

The annuity payments you receive can be paid weekly, monthly, quarterly, yearly, or at any other regular interval of time.

The frequency of your payments will differ depending on the type of annuity you have purchased as well as the terms and conditions set out in your annuity policy.

How do annuities work at death?

 If you decide to opt for a single annuity plan with no added features, when you die payments stop and the contract ends.

This means that your beneficiaries will not receive any payments from the fund unless you opt for a value protected annuity, which is sometimes referred to as a ‘capital protected’ annuity.

You may find that the minimum income payments are higher with a single annuity plan.

This is because in the event of your death payments stop, whereas with a joint annuity plan, payments continue to be paid to a named beneficiary and therefore the annuity provider may end up paying out more overall.

This option appeals to many who wish to leave their family some inheritance.


What is a capital protected annuity?

If you take out a joint value protected annuity (or a capital protected annuity), a lump sum will be paid to your beneficiary tax free, when you die.

The only exception to this is that if you die aged 75 or over, income from a joint plan will be added to your beneficiary’s other income sources and taxed as normal.

This option can appeal to those who wish to leave their family some inheritance.

How much tax do you pay on annuity income?

When using the money in your pension to buy an annuity, you can usually choose to have up to a quarter (25%) of the amount paid to you as a tax-free cash lump sum, and use the rest to buy the annuity. The annuity income you receive is taxed as earned income.


 Guaranteed Income - Annuities offer a guaranteed income stream for life, providing financial security and peace of mind in retirement. This can be especially beneficial if you're concerned about outliving your retirement savings.

High Rates in 2024 - Annuity rates in the UK are currently at historically high levels due to rising interest rates. This means you can potentially lock in a higher income stream than in previous years.

Protection from Market Fluctuations - Unlike investments like stocks and bonds, annuities are not directly affected by market volatility. This can provide stability and predictability in your retirement income.

Multiple Annuity Options - There are various annuity types available, each with its own set of features and benefits. You can choose an annuity that best suits your needs and risk tolerance (e.g., level income annuity, increasing annuity, joint life annuity).

Tax Advantages - A portion of your annuity income may be tax-free, depending on your individual circumstances.



Loss of Flexibility - Once you purchase an annuity, you generally cannot access the principal amount. This can limit your flexibility to respond to unexpected financial needs.

Inflation Risk - Standard annuities typically offer a fixed income stream. While some offer inflation protection, this might come at the cost of a lower initial income. Over time, inflation could erode the purchasing power of your annuity income.

Inheritance Issues - Annuity death benefits may be less than the original pension pot value. This can be a disadvantage if you want to leave a larger inheritance for your beneficiaries.

Early Death Penalty - Some annuities have penalties for withdrawing money before a certain period.  This can be a disadvantage if you need to access your funds unexpectedly.

Limited Growth Potential - Annuity income typically doesn't grow as fast as potential returns from investments like stocks and bonds (although the principal amount is guaranteed).

Additional Considerations:

 Age and Health - Generally, younger and healthier individuals may receive lower annuity rates compared to older or those with health conditions.

Retirement Goals - Carefully assess your retirement income needs and how an annuity fits into your overall retirement strategy.

Alternatives - Consider other retirement income options like drawdown plans or investing your pension pot to create your own income stream.


Produced by Hargreaves Lansdown

Historic Annuity Rates

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Resources to Find Rates

Annuity Rate Comparison Websites: Several websites allow you to compare annuity rates from different providers. Here are a few options: (Hargreaves Lansdown) (This website allows you to compare annuity rates based on your age, pension pot size, and desired annuity type) (Retirement Line) (This website provides resources on annuities and allows you to request quotes) (MoneySavingExpert) (This website offers general information on annuities but may not have a direct rate comparison tool.)


Get Quotes from Multiple Providers: Don't settle for the first rate you see. Compare quotes from several reputable annuity providers to ensure you get the best deal.

Consider Seeking Financial Advice: Consulting with a financial advisor can be helpful, especially if you have complex financial needs or are unsure about which annuity type is right for you.

Market Volatility: Be aware that annuity rates can fluctuate based on market conditions. The high rates seen in June 2024 might not stay the same indefinitely.


Choosing an annuity in the UK in 2024 has both advantages and disadvantages.  The high annuity rates make it an attractive option for guaranteed income, but the limitations on flexibility and potential for inflation erosion require careful consideration.  

Weigh the pros and cons based on your individual circumstances, risk tolerance, and retirement goals. Consulting with a financial advisor can be helpful in navigating your options and making an informed decision.

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