Annuities are generally used to convert your savings or pension pot into a low risk guaranteed income for your retirement. Some annuities work differently and the article below explains your options.
Published: 14 May 2024 Last updated: 17 Sept 2026
Key points:
A pension annuity is a guaranteed income you can buy with your pension pot when you reach 55 (or 57 from 2028)
You can choose whether you’re paid monthly, quarterly, half-yearly or annually
Before buying a pension annuity, you can take up to 25% of your pension tax-free, though this will reduce the amount available to buy your annuity and could result in a small guaranteed income
A joint life annuity will continue to pay an income to your partner after you’ve died
You can use money outside your pension, like savings or an inheritance, to buy a purchased life annuity
Imagine your life in retirement, with free time to travel, pursue hobbies, or just relax doing what you love. A guaranteed income could help you focus on the things that truly bring you joy.
Read on to learn how an annuity could help turn your golden years into a haven of financial stability.
So, what is a pension annuity?
You can use your pension pot to purchase an annuity once you're 55 (this will rise to 57 from 2028 unless you have a protected pension age). If you suffer from a serious health condition, you may be eligible for an annuity earlier. Find out how changes to the normal minimum pension age affect you.
You can choose between a single life or a joint life annuity. A single annuity pays you for the rest of your life. A joint annuity pays you for life, and when you die it pays a chosen percentage of your income to your beneficiary. This is usually your spouse, but it could be a partner, someone who is financially or medically dependent on you. If you choose a joint life annuity, the income you receive will be lower than with a single life annuity.
With this article, we'll delve into the annuity space and present you with a wealth of knowledge and viewpoints to help you decide whether an annuity fits into your retirement strategy.
What’s involved in the annuity buying process?
The foundation is built around an agreement between you and an annuity provider
You can purchase an annuity through your pension provider or shop around for a potentially better annuity rate
In most cases, you can choose how frequently to receive your taxable income (monthly, quarterly, half-yearly or annually) and whether to be paid in advance (at the beginning of the payment period) or in arrears (at the end of the payment period). You may be able to specify the regular payment date
Before purchasing an pension annuity, you can take up to 25% of your pension pot as a tax-free lump sum. However, this will reduce the amount available to buy your annuity and result in a smaller guaranteed income
For free and impartial help and guidance that’s backed by the UK Government, you can use Pension Wise
Taking time to understand how each type of annuity works can help you make an informed decision based on your retirement income needs.
Pension annuity
This type of annuity guarantees you a taxable income for the rest of your life. The annuity provider will calculate how much income they'll pay you (known as the annuity rate) based on factors such as your age, your health and your lifestyle. Annuity rates vary between providers, so shopping around could help you find a better deal.
The level of income you receive will also be affected by the options you choose, such as:
How frequently you’re paid
Whether you’re paid in advance or in arrears
Whether you choose a level income, an income that increases at a fixed rate or an income that increases in line with the Retail Price Index (RPI)
If you want your annuity to pay out for a minimum number of years, even if you die before that time
If you want your annuity to pay an income to your dependents after you pass away
Pros
The income is guaranteed for the ret of your life
Depending on how long you live you may receive more money as income than you paid for the annuity
Knowing what you'll receive and when could make your retirement easier
If annuity rates fall once it's been set up it will not impact your annuity as it's secured at the rate at the time it was set up
Cons
An annuity may provide poor value if you die in the early years and haven't arranged for it to be paid for a minimum length of time
Once an annuity is set up, it cannot be cashed in or changed in any way, even if your circumstances change.
Your annuity will be set up in line with the rates at the time, so you won't benefit from any future improvements in annuity rates.
If you choose a level income, inflation will reduce its spending power in the future.
To learn how our pension annuity can guarantee an income for life, there's plenty of information on our dedicated page.
For a simple way to get an idea of the income, you might receive from our pension annuity, try our annuity quick quote calculator.
Enhanced annuity
If you're considering a pension annuity, annuity providers may consider lifestyle and health conditions that could reduce your life expectancy, this could mean you may be entitled to a higher income from an enhanced annuity.
There are over 1,000 different medical conditions and lifestyle choices that might make you eligible. For example, if you live with:
high blood pressure or cholesterol
cancer
heart disease
diabetes
asthma
kidney failure
are a heavy smoker or heavy drinker
Investment-linked annuity
This type of annuity provides you with a varying retirement income based on the performance of investments linked to the annuity. Good investment conditions may produce an increasing income, whilst poor investment returns are likely to have a negative effect on the level of future income.
Like other annuities, you can choose what happens to your money after you pass away.
Pros
Gives you a more flexible retirement income, as your can choose how much to receive from a set range. This can include how much you get when the annuity begins.
There’s potential to reduce how much income tax you pay. For example, to avoid paying higher rates of tax, you could reduce your income. You can also take unplanned income payments.
Cons
Regular financial management and advice are required, for which there will be a charge.
As your income is based on the performance of the underlying investment, you may lose out on income if these investments don't perform as well as expected. You may get back less than has been paid in.
Fixed term annuity
Our Guaranteed Fixed Term Income Plan pays you a guaranteed income for a set period of time (3-25 years). You can choose to receive a regular income now, a lump sum at the end or both options. Any income taken now will reduce the lump sum.
Pros
It provides a guaranteed income for a fixed period, offering certainty over the income you receive.
You can select an optional guaranteed maturity value which can provide flexibility for future retirement planning.
No investment risk, as the income and maturity value will be provided at application stage.
Cons
Future annuity rates or retirement income options may be different when the term ends.
A fixed income may not keep pace with inflation unless features are included to provide escalation in line with inflation over time.
The maturity value and the income are linked. The more income you take, the lower the maturity value.
By delaying the purchase of a pension annuity by using a fixed term annuity, future changes in annuity rates may affect the level of income available. If annuity rates fall during this period, the income available from a pension annuity may be lower.
A retirement income you can count on
Buying a pension annuity means guaranteed pension payments for the rest of your life.
Purchased Life Annuity also known as an Immediate Life Annuity
A purchased life annuity provides you with a guaranteed income, either for a set period or for the rest of your life.
It’s bought using money from your own savings, an inheritance or tax-free cash from a maturing pension. It is a tax-efficient way to boost your existing pension income using money held outside a pension pot.
It can run for a set period or for life, though your income will end when you die unless you choose a death benefit, such as passing it on to your spouse or other family.
Pros
Part of the income will usually be treated as a return of your money, so you won't pay tax on all of it
You may be able to purchase one at any age, whereas pension annuities have age restrictions
You can buy it using funds from savings, inheritance, or tax-free cash from a maturing pension scheme
Cons
Once it is set up, it cannot be cashed in or changed in any way, even if your circumstances change.
What happens to your annuity when you die?
Value protection
With a single life annuity some providers offer value protection which means you can guarantee an amount that you wish for the annuity to pay out (up to 100% of the purchase price). If you die before you receive this amount, a lump sum equal to the shortfall will be paid to your chosen beneficiaries.
Joint Life
A joint life annuity will continue to pay to the surviving partner, receiving either partial or full payments for the rest of their life.
Guarantee period
If the person who receives the annuity payment (the annuitant) dies before the end of a guaranteed period, the annuity will either
Choosing how to fund your retirement is a big decision, so make sure you consider all the different options available to you. If you’re at all unsure of what will be best for you, we strongly recommend that you speak to a financial adviser. They may charge for their advice, but you will receive a recommendation based on your personal circumstances and you may be able to pay for advice directly from your pension pot. If you don't have an adviser, you can find one in your area using Unbiased.
Have a chat with one of our annuity experts. They’ll answer all your questions and queries and help you find out how much your annuity income could be.
They’ll clear up any questions you have and talk you through what comes next.
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