Annuity Calculator
A pot of money, drawn down evenly — the monthly income it provides.
How this is calculated
It’s the amortization formula in reverse: the level monthly amount that exhausts the lump sum exactly over the term, while the balance keeps earning the return you set.
Worked example: $500,000 at 5% over 25 years → about $2,900/month, and roughly $877,000 paid out in total. Lower the rate or lengthen the term to see the monthly change.
Converting capital into income you cannot outlive
An annuity exchanges a lump sum for a guaranteed income stream. What you are buying is not a return but the removal of longevity risk — the possibility of living longer than your money. That is a real risk that no investment strategy eliminates, and pooling it across many people is the only way to insure it. The price of that certainty is flexibility: in most cases the capital is gone and cannot be recovered.
The main varieties
A level annuity pays the same amount for life, which looks generous at the start and is quietly eroded by inflation — at 6%, its real value halves in twelve years. An escalating annuity rises annually and starts substantially lower. A joint-life annuity continues to a surviving spouse, at a lower initial rate. A guaranteed period pays for a minimum term even if you die early. Each option costs income, and the right combination depends on your other assets and who depends on you.
What determines the rate you are offered
Age is the largest factor, since a shorter expected payment period buys a higher rate. Prevailing bond yields matter enormously, which is why annuity rates move with interest rates and why the timing of purchase has a lasting effect. Enhanced or impaired-life annuities pay more to people with medical conditions that shorten life expectancy, and a great many buyers never disclose conditions that would have qualified them — declaring smoking, diabetes or heart conditions can raise income materially.
Shop before you buy
Rates differ meaningfully between providers, and the single most costly default is accepting the annuity offered by the company that held your pension without comparing the open market. The decision is generally irreversible, so the comparison is worth days rather than minutes — and phasing, buying in tranches over several years rather than all at once, reduces the risk of locking a lifetime income at a low point in rates.
Frequently asked questions
How can it pay out more than I put in?
Because the money still earning a return while it’s being drawn down — the total paid over the years exceeds the lump sum by the interest earned along the way. The longer the payout and higher the rate, the bigger that gap.
Is this a real annuity product?
It’s the underlying maths — a fixed-term income drawdown. Actual annuity products add insurer fees, guarantees, and sometimes inflation-linking, all of which change the payout. Use this to sense-check a quote, not replace it.