Annuity tips before you buy

If you've been paying into a personal pension during your working life, you'll have been building up a pension fund. There are various ways you can access this money from age 55. One of the options is to buy an annuity. This is designed to provide you with an income for the rest of your life, no matter how long you live.

An annuity is a way to ensure you get a guaranteed income in retirement.

You may also have paid into a pension scheme with an employer - if this is the case you'll need to find out how to access this by contacting them directly. Unless you have a final salary (defined benefit) pension scheme where you should automatically receive money as an annuity.

An annuity is a way to ensure you get a guaranteed income in retirement. Choosing an annuity is a big decision, as once selected, you cannot usually change your mind. We've put together some tips to help you work through your options.

Things to think about

  • Fixed or flexible income? Your income options and needs - having an idea of what you want to do in retirement and what your financial needs may be will help you determine if you want a secure and regular income for the rest of your life or more flexibility with your pension savings by being able to access them as and when you want to.
  • What you'll need to buy in future - what you spend your money on in retirement may be different to your current needs. For example, your utility bills may rise if you're spending more time at home. When choosing an annuity option, it's important to consider the effects of inflation as it could reduce the spending power of your income in the future. Also, it's worth knowing it's possible to buy an annuity which increases with inflation, but this will affect your starting income.
  • Compare the market - you can buy an annuity from any provider, so you should shop around, and, depending on your circumstances, you may be able to get a higher income elsewhere.
  • When to buy - if you delay buying your annuity when you retire, you won't necessarily get a higher income in the future because annuity rates can go down as well as up. It may also mean that you are losing out on income that may take longer to recoup than any growth of your fund from leaving it where it is invested.
  • Your health - If you and/or your partner have certain health and/or lifestyle conditions, you could be entitled to a higher income. Different providers may also cover different conditions.
  • The type of annuity you choose - if you want to provide an income for your loved ones after you die you should consider the options such as joint life or adding a guaranteed payment period or you could do both.  
  • The impact on any means tested benefits you receive - Housing Benefit, Income Support, or other benefits might be affected by the annuity you buy.
  • Existing debts - if you have debts, any creditors could have a claim on the money you receive.
  • Check your original pension plan - before looking to buy an annuity on the open market, check what's available under the standard terms of your pension. For example - you may be entitled to a guaranteed annuity rate or guaranteed minimum pension which may may provide a higher income.
  • Consider topping up your pension pots and/or combining your pension funds to buy an annuity - this could give you a higher income when you retire - but the value could still go down as well up whilst it is invested. Combining funds could also impact on any guarantees. 

Getting help to decide what's right for you 

We are not recommending a particular retirement option, or course of action, over another. 

For some products, like annuities, it’s important to shop around so you can get the highest possible income.  Both health and/or lifestyle can increase the amount of income you can get, and it’s important for you to know that different providers may use different criteria to assess your health and/or lifestyle conditions which could result in you getting a higher income. That’s why it's very important that you should shop around.

In addition to the support we offer, we recommend that, from age 50, you seek impartial guidance from Pension Wise, the free new service from the government that is available on the internet, over the phone or face to face. If you are unsure and need advice speak to a financial adviser.

Be mindful that investment scams exist and so it's important to be vigilant and carefully check the facts before deciding what to do with your money.

If you are a member of an occupational pension scheme, the options available to you may vary, so please contact your scheme provider.

How to set-up a financial review meeting

How to set-up a financial review meeting

We believe that getting financial advice is vitally important. So, if you don’t already have an adviser, set up a face-to-face meeting with a Prudential Financial Planning adviser in your area. We can review your retirement plans and help make your finances more tax efficient. We offer a restricted advice service.

Find out about our face-to-face service