Fixed term or lifetime annuity?

An annuity turns pension savings into a guaranteed income. The main choice is between a lifetime annuity, which pays you an income for the rest of your life, and a fixed term annuity, which pays a guaranteed income for a set number of years and then returns a maturity value or continues in some other way. A lifetime annuity pays out forever; a fixed term plan gives you income for a set number of years¹.

The rates you are offered depend heavily on your age and health. In April 2026, model rates for a healthy 65-year-old were 7.82% for a single life, level annuity with no guarantee, and 7.29% for a joint life 50% version². At 75, the single life rate rose to 9.70%². A healthy 65-year-old could get around £7,300 a year at the highest rate in January 2025, which was 10% higher than the lowest rate of £6,648³.

Once you buy an annuity, the decision is permanent. You cannot normally change or cancel it, and the terms are fixed⁴. That makes the choice between fixed term and lifetime, and the options you build into it, worth getting right before you sign.

Fixed term or lifetime: what each annuity pays

A lifetime annuity pays you an income for the rest of your life⁵. The payments are guaranteed for your lifetime, and the amount is set when you buy it⁹. You can choose for the income to last for your whole life or for a fixed number of years, and you can add options such as a guarantee period or a joint life arrangement¹⁰.

A fixed term annuity, sometimes called a short-term annuity, gives you income for a set number of years¹. One provider describes a short-term annuity as lasting no longer than five years, bought using some or all of the money in a drawdown fund¹¹. Another sets out fixed term annuities as running for 5 to 30 years with a maturity value at the end¹². At the end of the term, depending on the options chosen, you may receive a maturity value, a guaranteed income, or both¹³.

The practical difference is what happens at the end. A lifetime annuity keeps paying until you die. A fixed term annuity stops at a date you chose in advance, and what happens next depends on the terms: you might take the maturity value as cash, buy another annuity, or move the money into drawdown. A fixed term annuity can be bought with part of your pension pot, leaving the rest invested or available for other choices⁵.

Annuity rates: 7.82% for a healthy 65-year-old

Annuity rates are expressed as a percentage of the pot used to buy the income. In April 2026, model rates for a healthy 65-year-old were 7.82% for a single life, level annuity with no guarantee, and 7.29% for a joint life 50% version². At 75, the single life rate was 9.70%². At 55, the single life rate was 6.62%².

Those model rates sit alongside real quotes reported by Which?. In January 2025, the highest rate for a healthy 65-year-old produced around £7,300 a year, 10% higher than the lowest rate of £6,648³. A 65-year-old with a £100,000 pot could get up to £7,144 a year from a single-life, level annuity with a five-year guarantee in October 2024⁹. By May 2025, a 65-year-old with £100,000 could get around £7,800 a year from a single-life level annuity¹⁴.

Rates rise with age because the income is expected to be paid for fewer years. A 75-year-old with a £100,000 pot could get over £9,100 a year in October 2024⁹. A 70-year-old at the highest rate could get £4,063 a year from a £50,000 pension in January 2025, compared with £3,631 for a 65-year-old³.

Rates also depend on the options you choose. A joint life annuity pays until the second person dies, so the rate is lower than a single life version. An inflation-linked annuity starts lower but rises with prices. In October 2017, standard rate annuities at age 65 paid 5.22% for a level annuity and 3.2% for an inflation linked annuity¹⁵. Rates change, and there is no guarantee that annuity rates will be favourable when you buy, as they can change substantially and rapidly¹⁶.

Enhanced annuities for health and lifestyle conditions

An enhanced annuity pays a higher guaranteed income than a standard annuity, taking life expectancy factors such as medical conditions, smoking and where you live into account¹⁷. These pay out a higher income if your health or lifestyle may shorten your lifespan, including people with existing health conditions, smokers or people who are overweight⁵. Enhanced annuities are based on your life expectancy, so they pay you more if you have a health condition or smoke¹⁸.

The logic is straightforward: if you are expected to live for a shorter time, the provider can pay a higher income from the same pot. If you are in poor health, smoke or are overweight, you will be expected to live for a shorter time, so you are likely to get a higher income³. An enhanced annuity is a type of lifetime annuity that can pay you a higher income if you have health problems that may reduce your life expectancy⁴.

This matters because many people do not realise they qualify. Conditions that can lead to an enhanced rate include:

• Cancer
• Heart disease
• Diabetes
• Other long-term health problems
• Lifestyle factors such as smoking

If you have any health condition or lifestyle factor that could affect your life expectancy, it is worth checking whether an enhanced annuity would pay more than a standard one. The difference can be significant, and it is not something you can go back and change later.

What happens to the income when you die

With many types of annuity, payments will stop when you die¹⁹. Death benefits are not automatically payable; what happens depends on arrangements put in place when the annuity was purchased, such as a guarantee period, a joint life annuity or value protection²⁰. If you did not make any plans for payments to continue after your death or arrange value protection, payments will cease and no death benefits will be paid²⁰.

A single life annuity pays you an income until you die. When you die the payments stop, unless you have opted for a guarantee period¹³. With a single life annuity, when you die, your payments will stop, and any funds not paid out as income will stay with the annuity provider²¹. Single-life annuities usually stop payments when the person dies²².

A joint life annuity continues to pay after your death. A 50% joint life annuity is most common, but you can choose other percentages²³. Income continues for your spouse or civil partner after your death if you chose that option at setup²⁴. A fixed term annuity works differently: if you die during the term, the rest of the money will usually be paid to a beneficiary of your choice¹³.

Tax on annuity income and the 25% tax-free lump sum

When you buy an annuity, you can take up to 25% of your pension pot as a tax-free lump sum at the same time²⁵. The maximum tax-free amount is £268,275⁷. The remainder is used to buy the annuity, and all the income you earn from your annuity will be taxed as earned income²⁶. Income tax is deducted from the annuity by your annuity provider, using the tax code provided by HMRC²⁷.

A purchased life annuity works differently. This is an annuity bought with a cash lump sum from savings rather than a pension¹. Only a portion of the income is taxed: the capital element is a return of the original lump sum you paid and is free from tax, while the income element is taxed as savings income²⁶. A purchased life annuity uses a cash lump sum rather than your pension pot to provide a tax-efficient, guaranteed income for life or a set period²⁸.

Annuity income is not subject to inheritance tax⁸. The government has proposed that from April 2027 unused pension pots and death benefits will be included in your estate for inheritance tax, with exclusions for joint life annuities and spousal benefits²⁴. Scheme pensions and lifetime annuities must be payable for life and cannot decrease except in limited permitted circumstances²⁹.

Once bought, an annuity cannot be cancelled

Once you have set up your policy, the terms are fixed and you cannot normally change or cancel it⁴. Once set up, you cannot cancel or change an annuity if you change your mind¹². Once you have bought an annuity you cannot reverse the process³. This is the single most important thing to understand before you buy.

The rules do allow one narrow exception. A firm need not accept notification of cancellation of a pension annuity contract if the life (or any of the lives) assured under it has died before notice is given³⁰. In practice this means that if the person whose life the annuity is based on has already died, the provider does not have to accept a cancellation notice. It does not give you a cooling-off right in the ordinary sense.

This is different from most financial products, where you have a cooling-off period. An annuity is a contract for life, and the provider commits to paying you an income for as long as you live. That commitment cannot be undone. It is why shopping around matters so much: you are making a decision you will live with for the rest of your life, and a difference of 10% between the best and lowest rate was reported for a healthy 65-year-old in January 2025³.

Shopping around and combining pots

You are free to buy an annuity from any provider, so do not simply accept one from your existing provider³¹. An annuity need not be bought from the existing pension company³². Shopping around matters because rates vary: the highest rate for a healthy 65-year-old was 10% higher than the lowest rate in January 2025³.

You can combine all your existing pension savings to buy one annuity, which is likely to give you a higher income than lots of smaller individual ones³¹. It is also possible to combine all existing pension savings to buy one annuity, which is likely to attract a higher income³³. Combining pots can also make the process simpler, with one income rather than several.

If you have a guaranteed annuity rate on an older policy, the calculation changes. If you stay with your original provider and choose their annuity, you could secure a rate of between 7% and 11%³². These rates were built into pensions from the 1980s and 1990s and can be far higher than current market rates. Before transferring or combining an old pension, check whether it has a guaranteed annuity rate, because giving it up can cost you a great deal of income.

Where to get help

Pension Wise offers free, impartial guidance on your pension options, including annuities. The Pensions Ombudsman can look at complaints about pension providers if something goes wrong. The Financial Services Compensation Scheme pays 100% of an annuity if the provider goes bust⁸.

If you are in poor health, an enhanced annuity may pay more, and it is worth checking before you buy a standard one⁵. If you have several pots, combining them may produce a higher income³¹. If you have an older policy with a guaranteed annuity rate, check before you give it up³².

Annuity rates can change substantially and rapidly, and there is no guarantee that when you do purchase an annuity, the rate will be favourable¹⁶. The decision is permanent, so it is worth taking the time to compare providers, check your health status for enhanced terms, and consider whether a fixed term or lifetime annuity better matches how long you need the income to last.