Finance glossary
Annuity
In simple terms
An annuity is a product you can buy with your pension pot that pays you a guaranteed income — often for the rest of your life — in exchange for the lump sum.
On this page
What does annuity mean?
An annuity is bought with some or all of a defined contribution pension pot. In return for the money, an insurer pays you a set income, either for the rest of your life or for a fixed period.
It is one of the main ways to turn a pension pot into a reliable retirement income.
How an annuity works
You hand over your pot and the provider quotes an income based on your age, health, the size of the pot and the options you choose — such as a spouse’s pension, annual increases or a guaranteed minimum payment period.
Rates vary between providers, so shopping around (using the “open market option”) can noticeably increase the income you get.
How could this affect me?
An annuity gives certainty — an income you cannot outlive — which suits people who value security. The trade-off is that a standard annuity is usually irreversible and may not keep pace with inflation unless you choose (and pay for) increases.
Health conditions can actually increase the income offered, through an “enhanced” annuity, so it is worth declaring them.
Things to watch out for
- A standard annuity is usually irreversible once bought.
- Without inflation-linking, a fixed income loses buying power over time.
- Not shopping around can leave you with a lower income for life — always compare.
Know your rights
- You have the right to shop around for your annuity (the “open market option”) rather than taking your provider’s offer.
- Free, impartial guidance is available from Pension Wise/MoneyHelper before you decide.
- Annuities are provided by regulated insurers and may be covered by the FSCS; complaints go to the Financial Ombudsman Service.
General information, not personal advice
Consumer Credit is an independent information service. We do not provide regulated financial advice or sell financial products. For advice on your own situation, speak to an appropriately authorised firm or a free service such as MoneyHelper. About Consumer Credit.
Sources
We checked this page against these official and authoritative sources.
- MoneyHelper, Guaranteed retirement income (annuities) explained (opens in a new tab). Accessed 22 Aug 2026.