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 also be a dependent child under 23 years old. If you choose a joint life annuity, the income you receive will be lower than with a single life annuity.

In the first quarter of 2023, over 16,000 people bought annuities, spending £1.2 billion, the most since 2015. [1]Footnote 1 It could be due to rising interest rates and inflation, which can make annuities more appealing.

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 buy one through your pension provider or shop around for a better annuity rate
  • In most cases, you can choose how frequently to receive your taxable income (monthly, quarterly 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 can usually specify the regular payment date
  • Before purchasing an 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 support that’s backed by the UK Government, you can use Pension Wise

Looking at what each type of annuity offers can help you make a more informed decision about your retirement.

Lifetime annuity

Fixed term annuity

Investment-linked annuity

What happens to your annuity when you die?

This really depends on your annuity type.

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.

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 

  • continue to pay an income to their estate 
  • pay out a lump sum to the annuitant's estate

Learn more about what happens to your annuity after you die.

Non-pension annuities

Purchased life annuity

A tax-efficient way to top-up existing pension income using any cash outside of a pension pot. It could be from a property sale or inheritance.

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 can 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.

Options we offer to protect your annuity

Value protection

You can add value protection, which guarantees an amount that you wish for the annuity contract to pay out (up to 100% of the purchase price).

If you die before you’ve received this amount, we’ll pay a lump sum equalling the value to your chosen beneficiaries.

We’ve answered a few more frequently asked questions here.

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.

Looking for an Annuity?

Visit our Annuities page to see full details of what we offer.