How to Actually Buy an Annuity in the UK: A Practical Guide
The most expensive mistake most annuity buyers make happens before they’ve selected a single product. It’s accepting the rate offered by their existing pension provider rather than using the Open Market Option to compare across the whole market. The cost difference is typically £15,000 to £40,000 of lifetime income for the same capital. The decision takes about ten minutes to avoid.
Annuities are back on the agenda for the right clients, the rate environment from 2022 onwards has made them materially more competitive than they were across most of the previous decade. (We covered the case for whether to annuitise in "Annuities Are Worth Looking At Again", this article is about how to actually go about it.)
The mechanics of purchase look simple from the outside, choose a provider, transfer the capital, start receiving income. The reality involves several decisions that materially affect the outcome, and a number of routine errors that cost retirees meaningful amounts of lifetime income.
This is a practical step-by-step guide to buying an annuity in the UK. It assumes you’ve already decided that annuitisation, partial or full is the right answer for your retirement income strategy.
Step 1: Decide the income structure before you choose the provider
The single biggest determinant of the annuity income you receive is not the provider you select. It’s the structure of the policy itself. Five core decisions, each of which materially changes the price:
Single-life or joint-life. A single-life annuity pays income only while the policyholder is alive. A joint-life annuity continues paying, usually 50% to 100% of the original income to a surviving spouse on first death. For a 65-year-old couple, joint-life at 100% typically reduces the starting income by 15% to 20% versus single-life.
Level or inflation-linked. A level annuity pays the same income every year for life. An inflation-linked annuity rises annually, usually with RPI or CPI. Inflation-linked starts at a much lower income, typically 30% to 40% lower than the level equivalent and crosses over after roughly 12 to 15 years depending on inflation.
Guarantee period. A standard annuity stops paying on the policyholder’s death (or first death for joint-life). A guarantee period, typically 5, 10, or 15 years ensures payments continue for that period regardless of whether the policyholder survives. A 10-year guarantee on a 65-year-old single-life annuity reduces starting income by around 2% to 3%.
Value protection. Some annuities offer return-of-capital on death, the policyholder’s estate receives the difference between the original purchase price and the income paid out to date. Adds further cost; typically reduces income by 4% to 8%.
Frequency. Monthly, quarterly, or annual payments. Frequency affects pricing slightly, annual payments produce marginally higher headline income but are less useful for cashflow planning.
The right combination depends on the household. A married 65-year-old with a non-working spouse and minimal other pension provision usually needs joint-life with inflation linking. A single 65-year-old with substantial non-pension wealth and dependants who have other income sources may not need either.
The structural decisions get made first. The provider selection happens after.
Step 2: Disclose health honestly, the enhanced annuity question
For clients with health conditions, enhanced annuity rates can lift income by 10% to 30% above standard rates. Even smoker status alone produces a meaningful uplift.
The conditions that qualify are broader than most clients assume. Type 2 diabetes, controlled cardiovascular history, ongoing treatment for chronic conditions, certain occupational exposures, smoker status (current or recent), and meaningful BMI deviation can all qualify. Conditions that don’t feel particularly serious from a clinical perspective often produce materially better rates.
The honest underwriting application is worth doing simply to see the numbers, most enhanced annuity quotes are produced through a medical questionnaire and a brief GP report. The disclosure does not commit you to a purchase.
For a 65-year-old who qualifies for enhanced rates, the difference between standard and enhanced pricing on a £500,000 purchase can be £3,000 to £8,000 of additional income per year for life. Across a 20-year retirement, the cumulative difference is £60,000 to £160,000. This is the single most underused planning step in the annuity purchase process.
Step 3: Use the Open Market Option, don’t buy from your existing provider
When you have a defined contribution pension and you decide to annuitise, your existing pension provider will offer you an annuity rate. You are under no obligation to accept it, and in most cases you shouldn’t.
The Open Market Option allows you to use your pension capital to purchase an annuity from any FCA-regulated provider in the UK market. The rate differences across providers are material, typically 5% to 10% of starting income for the same capital, sometimes more for clients with health conditions where some providers offer better enhanced rates than others.
A simplified illustration. A 65-year-old with £500,000 of pension capital approaches three providers for a single-life, level, lifetime annuity quote. Provider A (the existing pension provider) offers £33,500 a year. Provider B offers £35,200. Provider C, particularly competitive on this client profile, offers £36,400.
Across a 20-year retirement, the difference between Provider A and Provider C is £58,000 of cumulative income. The decision to compare quotes takes about ten minutes. The decision not to costs roughly £290 a month for life.
This is where most retirees lose the most money on the purchase, and it’s entirely avoidable.
Step 4: Decide whether you actually need an adviser for the purchase itself
For a straightforward annuity purchase, single-life or joint-life, level or inflation-linked, no exotic features, the case for paying for advice on the purchase itself is weaker than most adviser articles suggest. The Open Market Option is accessible directly through online comparison tools and through annuity brokers who work for a fee or rebate.
For more complex situations, advice does meaningful work:
Where the purchase is part of a partial annuitisation strategy and the rest of the pension capital remains in drawdown, the structuring of the two halves needs to interact properly with your wider plan, your tax position, and your IHT exposure post-2027.
Where the client qualifies for enhanced rates and the underwriting process needs handling carefully, particularly where multiple conditions interact and provider rates differ materially.
Where the annuity is being purchased inside a trust, alongside other income sources, or as part of a coordinated post-exit deployment plan.
Where there are safeguarded benefits such as guaranteed annuity rates, with-profits guarantees, defined benefit pensions over the regulatory threshold, that require regulated advice before transfer.
For these situations, the value of advice is usually larger than the fee. For a simple purchase from a defined contribution pot with no underlying complexity, paying for advice on the purchase itself is optional.
Step 5: Transfer the capital and start receiving income
Once the structure is decided, the provider selected, and the underwriting completed, the mechanics are straightforward.
The pension provider transfers the capital to the annuity provider. The annuity provider confirms the income start date, payment frequency, and tax arrangements. Income begins, paid into your bank account on the schedule selected, taxed as income at your marginal rate above the tax-free lump sum.
The decision is generally irreversible, once the capital has been transferred and the income is in payment, the structure is fixed for life. The exception is the cooling-off period (usually 30 days from policy start), during which the purchase can be unwound. Beyond that, the structure stands.
Step 6: Coordinate the annuity with the rest of your retirement income strategy
The annuity is one component of a wider retirement income plan, not the whole of it.
For most clients we work with, annuitisation covers the floor, the income required to meet non-discretionary expenditure. The rest of the retirement income strategy involves drawdown from the residual pension, withdrawals from ISAs and GIAs, State Pension, and any DB benefits in the appropriate sequence.
The post-April 2027 IHT-on-pensions change makes this coordination more important than it was, not less. Drawing the right amount from the right pot in the right order across a 20-year retirement is materially more valuable than the annuity rate optimisation in step 3.
What this means in practice
If you are reading this because you are considering an annuity purchase, three structural questions are worth working through:
Have you decided what proportion of your pension to annuitise? Full annuitisation is rarely the right answer for our clients. Partial annuitisation against the slice that funds non-discretionary spending, with the rest kept invested in drawdown, is usually the better structure. The proportion depends on the maths of your specific situation.
Have you applied for enhanced annuity quotes regardless of how healthy you feel? The qualifying conditions are broader than most clients assume, and the income uplift is large. The honest underwriting application takes minimal time and produces a defensible figure.
Have you compared at least three providers across the whole market? Not just the rate offered by your existing pension provider. The Open Market Option is the single most underused decision in the entire annuity purchase process, and the cost of skipping it is usually five figures.