Things to know before buying an annuity

When deciding whether an annuity is right for you, it’s important to understand the factors that can affect your income and the level of flexibility you want.

Factors affecting annuity rates

Annuity rates can vary widely, and several personal and financial factors influence how much income you might receive:

• Age – Generally, the older you are when you buy an annuity, the higher your income. That’s because your expected payment period is shorter.
• Health and lifestyle – Medical conditions, smoking status and BMI can qualify you for an enhanced annuity, which pays a higher rate.
• Amount you spend - Sometimes the more you spend, the larger the annuity you can secure.
• Options you choose - such as a single life or joint life annuity, adding in fixed or inflation linked increases, guarantees or value protection can all affect the level of income you receive.

Choosing between different annuities

There's no one size fits all solution to annuities, so consider how different features align with your goals:

• Level annuity: Offers a guaranteed income for life
• Escalating annuity: Starts lower but grows each year to help maintain your spending power.
• Joint-life annuity: Continues to pay an income to your spouse or partner after you die.
• Enhanced annuity: Provides a higher income if you have qualifying health condition.

Guarantee periods and value protection

To safeguard your income and ensure your pension pot isn’t lost if you die early, it’s worth checking if providers offer:

• Guarantee periods: Income remains payable for a number of years, even if you die during that time.
• Value protection: Returns all or part of your original pot to your beneficiaries if you die before receiving that value back through your annuity payments.

While these features offer support, they can reduce the amount of income you receive.

Tax implications and withdrawal options

Income that comes from annuities is treated as taxable income, so the amount you receive after tax will depend on your marginal tax rate. ^{Footnote [1]}