Annuities 2026: Fixed vs. Variable, Fees, and Payouts in the UK 2026

What an annuity is and why it matters in 2026

If you’re planning for retirement in the UK, an annuity is one of those tools that can either secure you steady income or, if chosen unwisely, leave you with less flexibility than you’d hoped. At its core, an annuity is an insurance product that converts a lump sum into a regular, guaranteed payout for a period of time or for life. In 2026, the landscape has evolved , driven by interest rates, market dynamics, regulatory updates, and new product designs. For many savers, an annuity offers predictability in an era where other income streams can be uncertain. For others, it’s a decision to trade some flexibility for a dependable cash flow. Understanding the differences between fixed and variable annuities, along with the fee structures and payout mechanisms, helps you choose a path that aligns with your retirement goals.

Fixed annuities: predictability and simplicity

Fixed annuities are the simplest option on the market. When you buy a fixed annuity, you lock in a guaranteed payout rate for a specified period or for life, regardless of how financial markets perform. This can be reassuring if you’re risk-averse or if you want to ensure a minimum level of income to cover essential expenses. In 2026, fixed annuities in the UK often come with features like a guaranteed period (which ensures payments continue for a set number of years even if you die early) or a cost-of-living adjustment (COLA) that increases payments each year to keep pace with inflation, though not all products offer COLA, and those that do may have built-in caps or caps on increases.

The upside of fixed annuities is straightforward: reliability. The downside is that your income typically won’t grow much beyond the guaranteed rate, and your money is largely illiquid. If your circumstances change or if you need a lump sum later, you’ll face surrender charges or penalties for withdrawing early. For many retirees who value predictability over growth, fixed annuities can be a sensible anchor in a broader retirement strategy.

Variable annuities: growth potential and risk

Variable annuities, by contrast, tie your payouts to the performance of underlying investments ,usually a portfolio of stocks and bonds held within the annuity. In 2026, UK buyers may encounter a range of choices, from more conservative glide-path options to more aggressive equity-heavy allocations. The potential payoff is higher than fixed annuities when markets climb, but so is the risk: if markets decline, your payouts can shrink, particularly if the contract has a floor that isn’t sufficiently protective or if withdrawal rates are high relative to the account value.

Key considerations with variable annuities include:

Investment options: The range and quality of the fund lineup, and whether you can switch funds over time.
Caps and guarantees: Some contracts offer minimum withdrawal benefits or protected income riders, but these features cost more.
Surrender charges: Early withdrawal penalties can eat into value if you need liquidity.

If you’re comfortable with market exposure and want the potential for increasing income, a variable annuity can be appealing. If not, you might lean toward a fixed option or a hybrid that blends both principles.

Fees: what to expect in 2026

Fees matter because they eat into your guaranteed income. In the UK, annuity products can carry several types of charges, and the exact structure varies by provider and product design. Here are common fee categories you’ll want to understand:

Administration fees: Ongoing reporting and management charges for maintaining the annuity contract.
Investment management fees (for variable annuities): A percentage of assets under management (AUM) charged by the fund managers within the annuity. These can range from around 0.25% to 1.5% or more, depending on the fund mix and the provider.
Surrender charges: Penalties for withdrawing or terminating the annuity before a prescribed period ends. These are designed to discourage early access but can be substantial in some products.
Mortality and expense risk charges: Costs tied to insurance guarantees and the provider’s risk assumptions. These can be embedded in the stated fee structure but may not always be labeled as a single line item.
Rider and optional feature fees: If you add features such as guaranteed income riders, death benefits, or COLA guarantees, you’ll pay additional fees, often as a percentage of the benefit or as a fixed annual fee.

In 2026, transparency improved in many markets, but it’s still essential to read the Key Facts Illustration (KFI) or current product disclosure documents carefully. Compare the total expense ratio (TER) or ongoing charges figure (OCF) across products, and don’t just rely on the headline payout rate. A product with a higher guaranteed payout rate but significantly higher fees or less favorable terms can end up delivering a lower net income over time.

Payouts: how income is determined
Understanding how payouts are determined helps you forecast your retirement finances. There are two broad payout structures to consider:

Life annuities: A guaranteed income for as long as you live. This provides maximum security for longevity risk but does not typically offer a payout to beneficiaries after death unless you’ve purchased specific life insurance-like features.
Annuities with a guaranteed or fixed period: If you die before the end of the guaranteed period (for example, 10 or 20 years), payments may continue to a beneficiary for the remainder of that period. If you outlive the guaranteed period, payouts end, unless you’ve chosen a lifetime option with a minimum term.
Inflation-adjusted payouts: Some annuities include a cost-of-living adjustment (COLA) to maintain purchasing power. COLA can reduce initial payouts but helps preserve real income over time. Watch for caps on the rate of increase and any periods where increases are frozen.
Joint and survivor options: If you want to provide for a spouse or partner, you can choose a joint life option that pays until both people have passed away. These options generally reduce initial payouts because the insurer is spreading risk across two lifetimes.

When planning payouts, align your annuity choice with your overall retirement plan:

Essential vs. discretionary spending: If you have other reliable income sources (e.g., UK state pension, rental income, investments), you might allocate a portion of your lump sum to an annuity that covers essential needs, leaving flexibility for discretionary spending.
Longevity expectations: Consider your family history and health. A life annuity can reduce the fear of outliving savings, while a fixed-term product may be appropriate if you expect to work longer or have other income streams to cover the tail end of life.
Tax considerations: Annuity payments are generally taxable as income. The timing and amount of your other taxable income can influence the after-tax value of different payout options.

Real-world questions to ask before buying

What happens if I need more income later? Can I adjust the payout, add riders, or convert to a different product?
How does inflation affect my future purchasing power, and is COLA included? If so, what are the limits and conditions?
What are the surrender terms if I change my mind or need liquidity for a major expense?
Are there death benefits or beneficiary protections, and how are they priced?
How does the annuity interact with my other retirement accounts, such as pension pots, ISAs, or defined contribution plans?

Hybrid and modern approaches: blending security with growth
Many UK providers now offer hybrid options that mix fixed and variable elements, or annuities with accessible cash that can be withdrawn under certain conditions. A popular approach is to place a portion of the lump sum into a fixed annuity for baseline security while keeping another portion in a flexible account that can be invested, withdrawn, or reallocated depending on market conditions and life changes. This approach tries to balance the comfort of guaranteed income with the potential for upside growth or liquidity.

Negotiating and shopping: how to get a better deal

Shop around: Different providers price risk and guarantees differently. Obtain personalized quotes from multiple insurers and compare not just the payout rate but also the net guaranteed income after fees.
Use an independent adviser wisely: A retirement planning specialist who understands UK products can help you compare options and avoid products that look attractive in the short term but are costly over time.
Read the illustration carefully: The Key Facts Illustration (KFI) should reveal the underlying assumptions about interest rates, market performance, fees, and rider costs. Don’t rely solely on the promised payout without verifying the assumptions behind it.
Consider timing: Interest rates respond to the wider economy. If you can time your purchase to when rates are favorable, you may lock in higher guaranteed payments. However, timing is tricky, and delaying a decision can also introduce uncertainty about future income needs.

Regulatory and market context in 2026

The UK annuity market continues to adapt to a changing regulatory and macroeconomic environment. In 2026, you’ll see ongoing emphasis on consumer protection, clearer disclosures, and scenario testing to help buyers understand how different market conditions affect their payouts. The affordability and accessibility of annuities remain a focus, with more providers offering simplified options and online comparison tools. For buyers, staying informed about policy updates ,such as changes to pension freedoms, the state pension, and tax treatment of retirement products ,helps ensure that the selected product remains suitable as circumstances evolve.

A practical example: comparing fixed vs. variable with a hypothetical scenario
Let’s walk through a simple example to illustrate how fixed and variable annuities can play out. Suppose you’re considering converting £200,000 into retirement income in 2026. You’re choosing between:

A fixed annuity offering a guaranteed monthly payment of £950 for life, with no COLA.
A variable annuity targeting a 4% annual growth in the underlying investments, with a baseline guarantee of £880 per month and a potential upside.

In this simplified scenario:

The fixed annuity provides certainty: you know you’ll receive £950 each month for life, regardless of market moves.
The variable annuity offers potential for higher payouts if the investments perform well, but the actual payments will fluctuate and could be lower in down years. If markets rally and the guarantees hold, you could surpass the fixed option over time; if markets lag, your payments might be constrained.

When to prefer one over the other depends on your risk tolerance, other sources of income, and your health and longevity expectations. If you prize predictability and have limited other reliable income, the fixed option can be preferable. If you’re comfortable with some risk and want the possibility of higher income later, a well-structured variable annuity might be worth exploring.

Table: quick reference guide

Aspect	Fixed Annuity	Variable Annuity
Income certainty	High; payments fixed or with guaranteed period	Moderate to variable; payments tied to investment performance
Growth potential	Low to moderate (depends on COLA or rider)	Higher potential based on underlying investments
Fees	Typically simpler with fixed fees; may include admin charges	Often higher due to fund management and riders
Liquidity	Generally illiquid; surrender charges for early exit	Some flexibility, but may still involve penalties or fees
Inflation protection	COLA available in some products; often limited	COLA sometimes included with higher fees, or not guaranteed
Suited for	Renters who want reliability and simple budgeting	Investors who accept risk for potential higher income
Tax treatment	Taxed as ordinary income	Taxed as ordinary income; gains taxed on withdrawal

Final thoughts

Choosing between fixed and variable annuities in 2026 comes down to your personal comfort with risk, your other income sources, and how you want to balance security with potential growth. Fees matter more than you might think because they erode guaranteed income over time. Take the time to compare, ask pointed questions, and consider hybrid solutions that offer a middle ground. And always remember: an annuity is a long-term commitment. Make sure the product you select aligns with your long-range retirement plan and gives you the financial confidence to enjoy the years ahead