What is the Annuity?
An annuity converts a lump sum into guaranteed income, usually for life. The insurer takes longevity risk: you cannot outlive the payments, but if you die early the remaining capital is normally lost unless you buy a guarantee period.
The annuity rate depends on age, health, interest rates and the options chosen — a level single-life annuity pays far more initially than an escalating or joint-life one.
Formula & worked example
Break-even years = Lump sum / annual income
Worked example: a 400,000 pot at a 6.2% annuity rate pays 24,800 a year, or about 2,067 a month. You recover your original capital after roughly 16.1 years; live longer and the insurer pays out more than you handed over.
How to use this annuity calculator
- Enter the lump sum available to annuitise.
- Use a quoted annuity rate — they vary substantially between providers.
- Set expected years of payment based on realistic life expectancy.
- Escalation protects against inflation but sharply reduces the starting income.
Smart tips
- Always shop the open market. Provider rates differ by 5–15% for identical circumstances.
- Declare health conditions and smoking — enhanced annuities can pay substantially more.
- A level annuity loses purchasing power fast; at 3% inflation it halves in real terms over 24 years.
- Joint-life annuities pay less initially but continue to a surviving spouse.
- Compare against drawdown: annuities give certainty, drawdown gives flexibility and inheritance potential.
Frequently asked questions
What is an annuity rate?
The percentage of your lump sum paid as annual income. A 6% rate on 400,000 pays 24,000 a year for life.
Should I buy an annuity or use drawdown?
Annuities give guaranteed lifetime income and remove longevity risk. Drawdown keeps flexibility and inheritance potential but you could run out.
What is an enhanced annuity?
A higher rate offered to people with health conditions or lifestyle factors that reduce life expectancy — always worth disclosing.
Do annuity payments increase with inflation?
Only if you buy an escalating annuity, which starts substantially lower — often 30–40% less than a level annuity.
Want the theory behind the numbers? Read our retirement income guides on the Money Blog.
Written by Gurjeet Singh, Sharpen Solutions. Last reviewed 8 Sep 2026. How we check these numbers.