Why Shopping Around for Your Annuity Matters

Reviewed by Neil AinsworthLast updated: February 5, 2026 12:29 pm

Image credit: Kampus Production @Pexels

Understanding Annuities in Retirement Planning

Annuities remain a commonly used option in UK retirement planning, alongside alternatives such as pension drawdown and lump-sum withdrawals introduced under the 2015 pension freedoms¹. An annuity converts some or all of a defined contribution pension pot into a regular income, payable either for life or for a fixed term.

Annuity income is normally taxable at the recipient’s marginal rate. Up to 25% of a defined contribution pension can usually be taken as a tax-free lump sum, subject to the individual’s available lump-sum allowance and prevailing tax rules.

Selecting an annuity involves choosing both the type of product and the provider. These decisions can have long-term financial implications, which is why it is generally considered important to understand the available options before proceeding.

Types of Annuities

The main annuity types available in the UK include:

Lifetime annuities

These provide an income for life. Payments may be:

• Level (fixed)

• Increasing by a fixed percentage each year

• Linked to an inflation measure such as CPI

Additional features can include joint-life benefits, guarantee periods and value protection.

Investment-linked annuities

These link income payments to the performance of underlying investments (for example, unit-linked or with-profits funds). Payments can rise or fall depending on investment performance. These products differ from pension drawdown and carry different risk characteristics.

Some individuals may qualify for an enhanced (or underwritten) annuity due to health or lifestyle factors. Where applicable, this can affect the income offered, although outcomes depend on underwriting and provider criteria.

Current Market Context

Annuity rates fluctuate and are influenced by factors such as long-dated gilt yields and insurer pricing. In recent years, rates have generally been higher than those seen in the late 2010s, although they remain subject to change.

Indicative figures often quoted for healthy individuals purchasing a single-life, level annuity at age 65 have varied, with actual quotes depending on market conditions, product features and individual circumstances. Rates can change daily and should not be relied upon without obtaining a current quote.

Inflation and Income Sustainability

Inflation can reduce the purchasing power of a fixed income over time. Some annuities include escalation features designed to address this risk, such as:

• Fixed annual increases

• Index-linked increases (for example, CPI-linked)

These options usually result in a lower initial income compared with a level annuity. Whether such features are appropriate depends on individual priorities and circumstances.

The Importance of the Open Market Option

When purchasing an annuity, individuals are usually entitled to use the Open Market Option, allowing them to compare quotes from different providers rather than accepting an offer from their existing pension provider.

Regulatory reviews have highlighted that some annuity purchasers do not compare providers. Not comparing like-for-like quotes may result in accepting terms that are less competitive than those available elsewhere, particularly where enhanced annuity terms could apply.

Potential Financial Implications of Not Comparing

Differences between annuity quotes for the same individual and product features can be material. Over time, even relatively modest differences in annual income can accumulate into a significant sum.

The impact varies depending on:

• Pension pot size

• Product features selected

• Length of time income is paid

• Individual tax position

Outcomes cannot be guaranteed and will differ from person to person.

Common Considerations When Comparing Annuities

When reviewing annuity options, individuals may wish to consider:

• Obtaining multiple like-for-like quotes on the same day

• Reviewing product features such as escalation, guarantee periods and spouse’s benefits

• Disclosing health and lifestyle information accurately for underwriting purposes

• Understanding the implications of irreversible decisions once any cancellation period has passed

Because annuity rates and terms change, quotes are generally only valid for a limited period.

Wider Retirement Planning Context

Annuities are one of several ways to generate retirement income. Other options, such as drawdown or phased retirement strategies, involve different risks and flexibilities. Decisions may also be influenced by factors such as:

• Expected expenditure

• Health and longevity expectations

• Inflation risk

• Estate planning considerations

Some individuals combine annuities with other retirement income solutions.

A Financial Adviser Can Help

Engaging with a financial adviser can help identify competitive annuity rates and equip you to make informed decisions across all pension-related matters. The right advice can materially enhance your retirement income and reduce the risk of costly mistakes.

Given the complexities involved and the largely irreversible nature of annuities, professional advice is often a prudent investment. The potential uplift from choosing a more suitable product usually outweighs the cost of advice.

FinancialAdvisers.co.uk can assist you in this critical aspect of retirement planning by connecting you with an FCA-authorised and regulated financial adviser in your area. These professionals can guide you through the options and help you secure the best possible outcome for your retirement.

This article contains external links for further information on topics. Whilst all attempts are made to verify the trustworthiness of these external sources, we accept no responsibilty for the upkeep or security of these external websites. Some of these links in particular are annotated below:

• ¹ https://www.gov.uk/government/news/pension-changes-2015