Annuity Calculator United Kingdom 2026-27
Planning regular income from a lump sum investment.
Calculate the income stream from a lump sum annuity — monthly and annual payments, total interest earned, and full balance schedule. Compare term annuities from UK providers including Aviva and Legal & General.
This calculator models a term annuity using the standard PMT formula. Actual annuity products vary — compare rates directly with providers.
Select the question that matches where you are right now.
Your result shows the regular income generated by investing a lump sum in a term annuity. The payment includes both a return of your principal and interest earned — at the end of the term, the full balance will have been paid back to you as income.
Unlike interest-only products, each annuity payment contains both a return of capital and interest. Early payments are mostly interest; later payments are mostly principal return.
At any positive rate, you receive more in total payments than you invested. The difference is the total interest earned — this is your return for lending your capital to the annuity provider.
The key feature of an annuity is certainty — payments are guaranteed regardless of market conditions. This makes it fundamentally different from income drawdown (flexi-access drawdown) or an investment portfolio.
Three inputs drive the annuity payment: lump sum, interest rate, and term. The interaction between rate and term is non-linear — small rate changes have large effects on total income.
A 1% difference in rate has a significant effect on income. On £300,000 over 20 years: 3% gives £1,663/month; 4% gives £1,818/month — £155 more per month, £37,200 extra over 20 years from a 1% rate improvement.
A shorter term means faster capital return and higher monthly payments — but the income stream ends sooner. A 15-year annuity pays more per month than a 20-year annuity from the same lump sum but stops 5 years earlier.
A fixed annuity paying £2,000/month today will have purchasing power of roughly £1,400/month in 15 years at 2.5% inflation. This is a significant risk for long-term annuities. Use Detailed mode to see the real value of your income, or consider an indexed annuity product that increases with CPI.
Annuities compete with fixed-term savings, income drawdown, and investment portfolios. Each suits different priorities.
A term deposit at 5% on £300k earns £15,000/year in interest but leaves capital intact. An annuity at 3% over 20 years pays £19,966/year — more income, but capital is consumed. Choose TD if preserving capital is important; annuity if maximising income is the goal.
Flexi-access drawdown can pay more in good markets but less in bad. An annuity is fixed. The "floor and upside" strategy combines both: an annuity covers essential expenses, while drawdown provides growth potential and flexibility.
This calculator models a term annuity. A lifetime annuity typically pays less per year but continues until death — valuable if you live well beyond average life expectancy. At age 70, average life expectancy is ~86 (male) to ~89 (female).
Once you have a sense of the income your lump sum can generate, these are the next steps.
Get quotes from Aviva, Legal & General, and Just directly. Rates change weekly. Also compare via an independent financial adviser who can access the whole market. MoneyHelper (the government-backed service from MaPS) offers an annuity comparison tool, and Pension Wise gives free guidance to the over-50s.
The State Pension is not means-tested, so an annuity does not reduce it. But annuity income does count towards means-tested help such as Pension Credit (which tops a single pensioner's income up to £238.00/week in 2026/27) and towards local-authority care-cost assessments. Source: GOV.UK.
Annuity decisions interact with your pension, income tax, the State Pension, and care-funding planning. A fee-for-service retirement specialist can model the full picture. MoneyHelper's retirement adviser directory lists FCA-regulated advisers.
The annuity formula — how monthly income is derived from a lump sum
The annuity payment formula
An annuity converts a lump sum into equal periodic payments that return both principal and interest over the term. The formula is: PMT = PV × r(1+r)ⁿ / ((1+r)ⁿ − 1) where PV is the lump sum, r is the periodic interest rate, and n is the number of payments.
| Lump sum | Rate | Term | Monthly payment | Annual income |
|---|---|---|---|---|
| £200,000 | 3% | 20 yrs | £1,109 | £13,311 |
| £300,000 | 3% | 20 yrs | £1,663 | £19,966 |
| £400,000 | 4% | 20 yrs | £2,424 | £29,083 |
| £500,000 | 4% | 25 yrs | £2,901 | £34,812 |
| £750,000 | 4.5% | 25 yrs | £4,282 | £51,380 |
Key insight: you get back more than you put in
At any positive interest rate, you receive more in total payments than you invested — the difference is interest earned. At 3% over 20 years on £300,000, you receive £478,000 total — £178,000 more than your initial investment. This is the return on your capital.
Term annuities, lifetime annuities, and income drawdown compared
Term (fixed) annuities
Pay a fixed income for a set number of years. At the end of the term, payments stop. If you die before the term ends, payments continue to your estate or nominated beneficiary (depending on the product). Providers include Aviva and Legal & General. Rates typically range from 3% to 5% depending on term length and prevailing interest rates.
Lifetime annuities
Pay income until you die, regardless of how long you live — eliminating longevity risk. The trade-off is that if you die early, your estate receives nothing (unless a guaranteed period is chosen). Aviva is the dominant provider in the United Kingdom. A 70-year-old man can typically receive £4,500–£5,500/year per £100,000 invested.
Indexed vs flat annuities
Indexed annuities start at a lower income but increase with CPI each year. Flat annuities pay more initially but lose real value over time due to inflation. For long retirement periods (20+ years), indexation is important — £2,000/month in 2025 will have significantly less purchasing power by 2045.
Income drawdown (for comparison)
Flexi-access drawdown is not an annuity — it keeps your pension pot invested and you choose how much income to draw each year, with no set maximum. The balance can grow or fall with markets, and can run out if you draw too heavily. Drawdown offers more flexibility but no guaranteed income. Many retirees combine drawdown for growth with an annuity for income certainty.
How annuity income is taxed — the tax-free lump sum, PAYE, and purchased life annuities
The 25% tax-free lump sum
When you use a pension pot to buy an annuity, you can normally take up to 25% of the pot as a tax-free lump sum first (the pension commencement lump sum), capped by the Lump Sum Allowance of £268,275 in 2026/27. The remaining 75% then buys the annuity.
Annuity income is taxed under PAYE
Income from a pension-funded annuity is taxable as pension income at your marginal rate (20%, 40% or 45%), collected through PAYE just like a salary. Your Personal Allowance (£12,570 in 2026/27) still applies across your total income, including the State Pension.
Purchased life annuities
An annuity bought with ordinary (non-pension) savings — a "purchased life annuity" — is taxed more lightly: part of each payment is treated as a tax-free return of your capital, and only the interest element is taxed as savings income. Source: GOV.UK — Tax when you get a pension.
How to use annuities in a retirement income strategy
The "floor and upside" approach
The most widely recommended approach is to use an annuity (combined with the State Pension) to create a guaranteed income floor covering essential expenses — housing, food, energy — and keep the remainder in income drawdown or investments for discretionary spending and growth. This eliminates the anxiety of market downturns eroding essential income.
Sizing the annuity
A common rule: calculate your essential annual expenses (say £25,000/year), subtract your full new State Pension (£12,548/year in 2026/27, at £241.30/week), and buy an annuity covering the remainder (about £12,500/year). This might require £250,000–£350,000 in an annuity, leaving the rest in growth assets.
Interest rate timing
Annuity rates are directly linked to bond yields — when rates are high, annuity income is higher. After the 2022–2024 rate rises, annuity rates improved significantly. Locking in an annuity during a high-rate environment can be advantageous, though rates can always change.
Get financial advice
The interaction between annuities, the State Pension, your wider pension, and income tax is complex. A fee-for-service retirement specialist can model the optimal combination for your circumstances. MoneyHelper also has free retirement guidance, and the over-50s can book a free Pension Wise appointment.
Frequently asked Frequently asked questions
What is an annuity in the United Kingdom?
An annuity is a financial product where you pay a lump sum to a provider and receive regular income payments in return. Term annuities pay for a fixed period; lifetime annuities pay until you die. UK providers include Aviva, Legal & General, and Just. This calculator models a term annuity — a fixed payment stream returning both principal and interest over the chosen term.
Is annuity income tax-free?
No. Income from a pension-funded annuity is taxable as pension income at your marginal rate (20%, 40% or 45%), collected through PAYE. However, before you buy the annuity you can normally take 25% of the pension pot as a tax-free lump sum. An annuity bought with ordinary savings (a purchased life annuity) is taxed only on its interest element, as part of each payment is a tax-free return of capital.
What happens to an annuity when you die?
For term annuities: remaining payments continue to your estate or nominated beneficiary. For lifetime annuities without a guaranteed period: payments stop and nothing is returned. Many lifetime annuity products offer a guaranteed minimum period (e.g. 10 years) — if you die within that period, payments continue to your estate until the period ends.
Are annuities a good investment in the United Kingdom?
Annuities are not primarily an investment — they are an income security product. They excel at eliminating longevity risk (outliving your money) and provide certainty regardless of markets. The trade-off is illiquidity and relatively low returns compared to equities. They work best as a floor income strategy alongside growth-oriented income drawdown.
Where these figures come from
Pension and retirement figures on this page are drawn from HMRC (pension tax rules and Lifetime Allowance), the Department for Work and Pensions (State Pension), The Pensions Regulator (workplace pensions), and MoneyHelper (consumer guidance).
- Annual Allowance & tax on pension contributions — GOV.UK — Tax on your private pension contributions.
- State Pension age & entitlement — GOV.UK — The State Pension.
- Workplace pensions & automatic enrolment — The Pensions Regulator — Automatic enrolment.
- Pension freedoms & access from 55 — MoneyHelper — Taking your pension.
- Pension tax relief rates — GOV.UK — Tax relief on pension contributions.
Last checked: April 2026. Rates and thresholds are reviewed against the source of record each November, when annual adjustments for the following tax year are published.