About the Annuity Calculator
An annuity is a trade: you hand a pension pot to an insurer, and it pays you an income until you die, however long that is.
That last clause is the product. Nothing else in finance removes the risk of outliving your money, and nothing else is bought with a single irreversible decision made on one afternoon.
So the useful questions are not "what is the income" — the quote already says — but how long you must live to get your money back, what return you are actually being offered, and what the options cost. This calculator answers those three.
How to Use the Annuity Calculator
Enter the pension pot and the annual income you have been quoted. Both come straight off the quote.
Then your age now and the age you want to plan to. The whole comparison turns on that second figure, so it is worth running more than one.
Income rises each year by — set to zero for a level annuity.
What the pot could earn instead is the return you would expect if you kept the money invested rather than buying the annuity. This produces the honest break-even rather than the flattering one.
Step-by-Step Example
A £250,000 pot quoted at £15,000 a year, at 65.
Annuity rate: 15,000 ÷ 250,000 = 6%Six percent looks excellent against any savings account. It is not a return.
Plain break-even: 250,000 ÷ 15,000 = 16.67 years, so age 81.67You do not get your own money back until nearly 82 — and that is before counting anything the pot could have earned.
The Annuity Rate Is Not a Return
This is the single most common misreading of an annuity quote.
The annuity rate is income divided by pot. Most of each payment is your own capital coming back, not interest on it. A 6% annuity rate would return your entire pot in under seventeen years even if the insurer earned nothing at all.
The actual return depends on how long you live:
| Live to | Total received | Implied return |
|---|---|---|
| 75 | 150,000 | none — a loss |
| 82 | 255,000 | 0.22% |
| 87 | 330,000 | 2.56% |
| 95 | 450,000 | 4.31% |
At the expected age of 87, the 6% headline is a 2.56% return. The other 3.44 percentage points are your own money being handed back to you.
The Honest Break-Even
Dividing the pot by the income ignores the fact that keeping the pot was always the alternative — and a pot that stays invested keeps earning while you draw from it.
Drawing 15,000 a year from a pot growing at 4%:
exhausts after 29 years, at age 94Age 94, not 81.67. Over twelve years later.
The break-even moves sharply with the assumed return:
| Pot earns | Break-even age |
|---|---|
| 0% | 82 |
| 2% | 86 |
| 4% | 94 |
| 5% | 102 |
| 6% | never |
At 6% the income is exactly what the pot earns, so drawing it never touches the capital at all. Above that, no break-even exists — the annuity can only lose on the money.
That table is the argument in one place. Whether an annuity pays depends almost entirely on two things you cannot know: how long you live, and what markets do.
Level or Escalating?
An escalating annuity starts lower — typically around a third lower for 3% escalation — and rises each year.
The comparison people make is when the payment overtakes, which happens reasonably early. The comparison that matters is when the total money received overtakes, and that is much later:
Level 15,000 against a rising income starting near 10,050 at 3%:
total received does not overtake until year 27 — age 92Before 92 you are behind. Escalation buys protection against inflation, not more money, and the bet is on living long enough to collect it.
So Is an Annuity a Bad Deal?
On the average lifespan, usually yes on the arithmetic. At 2.56% against a pot that might earn 4%, this example loses.
That is not the right test.
An annuity is insurance against living a long time. Insurance you do not claim on always looks like a bad purchase afterwards — nobody calls their house insurance a poor investment because the house did not burn down.
The question is not whether the average case pays. It is whether you can afford the outcome where you live to 100 and the invested pot has run out. An annuity removes that risk entirely, and nothing else does.
What follows from that is a matter of circumstances: how much other guaranteed income you have, whether you have someone depending on you, and how much of the pot you actually need to annuitise rather than all of it.
Understanding Your Result
Income is what the quote pays.
The annuity rate is the headline figure, labelled as what it is.
Break-even age gives the cash figure and the one that counts.
What it actually returns is the implied rate at your assumed lifespan — the figure to compare against anything else.
Worth knowing puts the arithmetic in its place relative to the insurance.
When Should You Use This Calculator?
Before accepting any annuity quote. Particularly to see the implied return next to the annuity rate.
Comparing level against escalating. The crossover year is the decision.
Deciding how much to annuitise. Often the answer is "enough to cover the essentials" rather than all of it.
Checking quotes against each other. Rates vary considerably between providers, and this cannot be undone once done.
Common Mistakes
Reading the annuity rate as a return. It is mostly your own capital.
Breaking even by dividing. It ignores what the pot would have earned — here that is the difference between 82 and 94.
Comparing the escalating payment rather than the running total. The payment overtakes years before the money does.
Not shopping around. This is a one-time, irreversible purchase and rates differ.
Not declaring health conditions. Enhanced annuities pay materially more, and you have to ask.
Annuitising everything. Guaranteed income for the essentials and flexibility for the rest is a common compromise that this calculator cannot evaluate for you.
Every figure here is an estimate for planning. Decisions of this size normally warrant regulated advice, and this is not it.