How annuity providers invest your money, and how safe it is

How do annuity providers make money? They invest what you pay in bonds and long-term loans, aiming to earn more than the income they promise.

An annuity is a contract, not a fund you own. You hand over a lump sum, the insurer promises an income for the period the contract says, and in between it invests your money. This guide covers what UK insurers hold, where the profit comes from, and what the investing means for the safety of your income. Pension Wise, from MoneyHelper, offers a free appointment on your options, and should you want to weigh an insurer's strength against the income on offer, an FCA-authorised adviser can do so on a call-back; you can request one through this page's short form without paying.

Where your money goes when you buy an annuity

The Financial Services Compensation Scheme (FSCS) gives an annuity as the common example of swapping the cash in your pension for a regular income from an insurance company. After that swap, what you hold is the insurer's promise, not a share of particular investments. The pension annuity guide covers how the contract pays out; here the question is what the insurer does with the money.

The Bank of England's Prudential Regulation Authority (PRA) bases one of its capital rules on the idea that annuity writers are "buy-and-hold investors with locked-in funding". In a speech on 26 April 2018, David Rule, then its Executive Director of Insurance Supervision, explained why that shapes what they buy: provided they match the cash flows of their assets to those of their liabilities, they "should rarely need to sell assets prior to maturity".

In plain terms, the insurer chooses investments that pay out cash around the times it expects to pay annuity income, then tries to hold them until they do. A PRA speech of 29 April 2026 adds that UK annuity liabilities are long-term and predictable.

What do annuity companies invest in?

Mostly bonds, with the rest in long-term loans secured on property or infrastructure. In that April 2026 speech, Gareth Truran, the PRA's Executive Director of Insurance Supervision, said sovereign and corporate bonds, mostly sterling, make up around 60% of UK insurers' matching adjustment portfolios, the pools of assets set aside against annuities. The other 40% are "illiquid or non-traded assets", and the examples he gave were infrastructure debt, secured residential and commercial property lending, and equity release mortgages.

• Government and company bonds. Loans to the UK or other governments and to companies, paying interest and repaid at a set date.
• Infrastructure lending. Long-term finance for projects; in 2018 the PRA named social and student housing and wind and solar power among the areas insurers were financing.
• Property-backed loans. Lending secured on commercial or residential property.
• Equity release mortgages. Loans to older homeowners, repaid from the sale of the home after the borrower's death or move into long-term care, as the PRA described them in 2018. The equity release guide explains the product from the borrower's side.

These are figures for UK insurers as a group, and the speech itself says "Individual firms’ investment portfolios, risk appetites and capabilities also vary". Treat the split as the sector's shape rather than any one firm's. The speech also notes that the illiquid share has grown somewhat over the last ten years.

How do annuity providers make money?

They earn a return on the assets above what their annuity promises cost, and they are paid for the risks they take on. Two things sit behind that.

The extra return. The gap between what an asset yields and the yield on a risk-free benchmark is called a spread. The 2018 PRA speech said spreads on investment grade bonds had been narrow for some time, so insurers were finding wider ones in other long-term lending, and that "the shift into illiquid assets is giving insurers a double benefit: first wider spreads and second a bigger Matching Adjustment." That is a regulator explaining why insurers moved, as at 2018.

Carrying the risks. The insurer, not you, bears the risk that borrowers default or are downgraded. Mr Truran's 2026 speech says insurers need to be properly compensated for the risks they take, and warns that competition in bulk annuity pricing squeezes their margins, raising the chance they take on risk they are not adequately paid for.

What the insurer pays you is set when you buy. The effect of age, health and interest rates on it is set out in where annuity rates are heading and in the guide to enhanced annuity rates, and the charges that apply are in annuity fees. Why a given insurer prices your annuity as it does is one for an FCA-authorised adviser; a call-back costs nothing through the form on this page.

How can an insurer guarantee an income for life?

By matching assets to payments, holding capital against what could go wrong, and being supervised on both. The guarantee is a contractual promise by the insurer, and those three things are what stand behind it.

The regulator's "matching adjustment" rule rewards the buy-and-hold approach. As the PRA put it in 2018, insurers that follow it "are allowed to discount their annuity liabilities at higher than risk-free rates, reducing their liabilities and therefore boosting their current available capital." In short, the rules treat everyday price swings in assets held to maturity as less threatening than a borrower failing to pay.

The PRA tests that idea. Its 2025 life insurance stress test (LIST 2025) "assessed the sector’s resilience under severe but plausible scenarios, including a significant credit downturn", and it published firm-by-firm results for the first time. The 2026 speech says the test showed how the matching rules let insurers look through short-term price swings and avoid becoming forced sellers, while credit defaults and rating downgrades remain key drivers of their solvency under stress.

Does the way a provider invests affect how safe your annuity is?

Yes: what matters is the credit quality of the assets, whether they might have to be sold in a crisis, and who carries the market risk. The PRA's stated aim in 2018 was that insurers remain "safe, sound and able to meet the promises they are making to holders of annuities over the coming decades".

Credit quality. At year-end 2024, two-thirds of UK insurers' underlying matching adjustment assets had external credit ratings, and less than 1% of assets were below investment grade. The other third are not externally rated, and the PRA tests whether insurers' own credit assessments give the same results as an external rating agency would.

Valuation and selling. The PRA says valuation uncertainty and illiquidity matter most where assets might have to be sold in stress, and that given long-term annuity cash flows and the matching rules this has traditionally been less of an issue in the UK from a solvency perspective. It adds that it will hold firms to high standards as they move into new kinds of asset.

Who carries the market risk. The PRA contrasts annuities with unit-linked and with-profits business, "where most or all of the investment risk lies with the policyholder". With an annuity the insurer carries it. If you instead keep your pot invested in pension drawdown, its value can fall as well as rise, and you may get back less than you put in.

If the insurer itself failed, the FSCS says that where it can pay compensation it covers a pension "at 100% with no upper cap". The conditions are in what happens if your annuity provider goes bust.

Using this when you compare annuity providers

Annual solvency reports give you something concrete to read. Legal & General's life cover terms, for example, say it is required to publish an annual Solvency and Financial Condition Report (SFCR) describing its business and performance, system of governance, risk profiles, valuation for solvency purposes and capital management. Ask a provider you are considering whether it publishes one and where to find the latest.

Quotes differ with your age, health and the features you choose, so a gap between two of them does not by itself show how either insurer invests. Pension Wise explains your options, and free annuity advice lists other routes. Choosing between named insurers alone is hard going; an FCA-authorised adviser will talk you through it by phone if you request a call-back in this page's short form. Whether an annuity suits you at all is a separate question, covered in is an annuity worth it.

Annuity money: more questions answered

Where do annuity payments come from?

They come from the cash the insurer's investments produce, such as interest and repayments, timed to match the payments it has promised. The promise to pay is the insurer's, whatever its investments return, and the PRA stress-tests the sector against a significant credit downturn.

Is my annuity money lent to other people?

In part. The PRA says insurers' illiquid assets are mostly lending secured on property or infrastructure, to businesses and to individuals, and equity release mortgages to older homeowners are one example. Bonds, which are loans to governments and companies, make up the larger share.

Does my income change if the markets fall?

For a standard annuity, the insurer takes the investment risk, and the income follows the contract you bought. Some contracts have features that change the income over time, so check what yours promises; inflation-linked annuity rates covers one.

Do insurers take more risk to offer higher annuity rates?

The PRA has said ongoing competition for yield is leading some firms to consider a broader range of asset structures, and it supervises that. Rates also move with your age, health and the product you choose, so a higher figure is not in itself a sign of riskier investing.

Is an annuity covered if the provider fails?

The FSCS can protect annuities from UK-regulated insurers, provided the contract qualifies as long-term insurance. How the income would continue is explained in our provider-failure guide.

An FCA-authorised adviser can cover how insurers invest, and how that fits your plans, for free; this page's call-back form is where to start.