What's an annuity and should you buy one?

Types of annuity

Annuities have earned a reputation for being inflexible but there are many different types, different features available - each designed to add flexibility.

 As well as fixed-term and enhanced annuities which only provide an income for the pension owner, you can also buy joint-life annuities. These allow your spouse to carry on receiving an income after you die. You can also get inflation-linked annuities, which adjust your income on an ongoing basis to keep pace with prices. 

Adding and removing features might alter the income you receive so we strongly recommend speaking to a financial adviser before making any decisions. (An adviser may charge for their services – though they should agree any fees with you upfront.)

Once you’ve used your pensions savings to buy an annuity, you can't usually change your mind - even if your circumstances do. So, it’s really important you get things right first time. Our guide to your retirement options might help you to decide.

And, if you don't think an annuity is for you, there are other retirement options you could consider.

1. Lifetime annuity

A lifetime annuity pays a guaranteed regular income until you die.  The amount you're paid is determined by how much you invest, as well as your age and general health.

2. Fixed-term annuity

Fixed-term annuities (also known as certain-term or short-term annuities) pay you a regular income for a set period of time. The rest of your pension will be left invested, and once the fixed term ends, you'll need to decide what to do with the rest of your pension savings. This could include taking a lump sum or buying a further income.

3. Enhanced annuity

An enhanced annuity takes your health and lifestyle into account when working out the income you’ll receive if you have a long-term illness or medical condition, smoke or are overweight you may be able to boost the income you receive. This is because enhanced pension annuity rates are generally better than other annuities.

4. Joint-life annuity

This type of annuity is designed to continue paying your spouse or another beneficiary some or all the income you were receiving, after you die. It can be useful if your beneficiary doesn’t have much in the way of retirement provisions of their own.

5. Inflation-linked annuity

Inflation-linked annuities adjust your regular yearly income to keep pace with inflation (sometimes known as an RPI annuity because they track the retail price index). To begin with, the money you receive (your annuity payments) can be much lower than if you'd chosen a level or fixed-term annuity.

We hope you're going to enjoy a long and happy retirement so when it comes to something as important as your pension, you may want to speak to a financial adviser. They may charge for their services – though they should agree any fees with you upfront.

Should I buy an annuity?

Buying an annuity isn't for everyone. It could offer you some reassurance because you'll know the amount of money you'll receive, and how long that money will last. However, it might not offer the flexibility of other products that might suit your circumstances better.

Buying an annuity is a big decision and not one that should be entered into lightly. This is because you can't usually change your mind once you have bought an annuity. It can be a good idea to seek professional advice before making changes to your pension because financial decisions often need careful management.

A summary

Benefits and features:

1. Guaranteed income for life - your money won't run out. However, it can go down, but only in limited circumstances, for example, where varied in line with an index.
2. Sense of security and income confidence - know exactly how much you'll receive each time you receive your pension income
3. Support beneficiaries or loved ones - continuing annuity or the payments
4. Up to 25% tax-free - you can usually take up to 25% of your pension tax-free before buying an annuity
5. Income options to suit you – whether you prefer a fixed or increasing income, monthly or yearly, you have control
6. Higher income - enhanced annuities can offer higher payments if you’re in poor health.

Things to consider:

1. No going back - you can’t make any changes or get the pension lump sum back once your annuity has started
2. You may get less back than you paid in – some fixed-term annuities only pay an income when you’re alive, so you may get back less than you paid in
3. Income tax – depending on your circumstances, the money you get from an annuity could be taxable
4. No cash-in or surrender value if your circumstances change
5. Incorrect information may change your income - for enhanced annuities, inaccurate health details which don’t match your application could result in lower payments.