Types of annuity

Choosing how you take your pension savings is one of the most important financial decisions you'll have to make. And buying an annuity is one of the ways that you could turn your pension into an income. 

Annuities come in different shapes and sizes - with options that could meet your needs, such as providing for a loved one after you die. 

Understanding the different types of annuity is important, since you can’t currently change your mind once you’ve bought one. So let’s take a look at the choices available.

You could increase your annuity income if you suffer from certain health and/or lifestyle conditions.
  1. Conventional annuity with ‘level income’
    This annuity guarantees to pay you a fixed rate of income so you’ll know exactly how much you’ll get from your first payment, and for the rest of your life. With this type of annuity, your income will not increase - no matter how long you live, so inflation will reduce what you can buy in the future. 

  2. Conventional annuity with ‘changing income’
    With this type of annuity, you’ll still have a guaranteed income for the rest of your life but this might change each year. Depending on which you choose, this will be either in line with the Retail Prices Index (RPI), or by a set amount, typically 3%. This may help you keep pace with inflation or you might even exceed it.  However, if you choose a set amount then your income may still be less than inflation. Similarly, if inflation goes below zero, your income will go down - unless your annuity has a negative-inflation guarantee. 

  3. With-Profits annuity 
    A With-Profits annuity is linked to a With-Profits Fund. This means that your income has the potential to grow and could help reduce the effects of inflation. Your income could also fall though, but not below a certain amount. You may also be able to change your income each year too. However, if you take a higher starting income, there will be less potential for it to go up and more chance of it going down in the future. 

  4. Unit-linked annuity
    A unit-linked annuity matches your retirement income with the value of an underlying investment fund. Your income changes to reflect the value of the funds that you select for your annuity to be invested in.  This means that your investment, and the income from it, could go down as well as up and you may not get back what you put in. The funds can be low, medium or high risk, depending on what’s offered by your provider. This is a complex product, so you should seek financial advice if you want to find out more.

Additional options

  • If you opt for a single-life annuity, payments will only be made until your death. However, there are two additional options available that can provide an income for someone after you die. You could choose one or the other, or even both.
  • A joint-life option. Although your initial starting income will be lower than with a single life annuity, you can  ensure that your partner, spouse or any other chosen dependant will continue to benefit from your pension for the rest of their life if you die before they do. You can also decide whether they will receive the same level of income as you, or less. The income, however, won’t be paid if your partner or spouse dies before you or if your named dependant is no longer reliant on you at the date of your death.
  • A guaranteed payment period . This means that, even if you die, your annuity will continue to be paid for a minimum number of years. This is normally up to 10 years from the start of your annuity. With this option you’ll usually receive a lower starting income and this could go down more if you choose a longer guaranteed period. The income will usually be paid to your spouse, civil partner, estate or someone named in your Will. Although, if you live longer than the period selected, no further income will be paid when you die.

Health and/or lifestyle conditions

You could increase your annuity income if you (and/or your loved one when you select the 'joint-life' option) suffer from certain health and/or lifestyle conditions when you take out the annuity. Different providers may also cover different conditions, so if you think this applies to your circumstances, make sure you look around as this could result in an even higher income.

Look into each of these options before you take out an annuity because they can’t be added or changed at a later date. When you do buy your annuity, you can normally opt to be paid monthly, quarterly, half-yearly or yearly, and in advance or arrears. And whatever you decide, you don't have to stay with us. You should shop around and, depending on the choices you make, you may be able to get a higher income elsewhere.

In addition to the support we offer, we recommend that, from age 50, you seek impartial guidance from Pension Wise, the free service from the government that is available on the internet, over the phone or face to face.

Our retirement calculator could help you to work out the best way to take your pension. But we are not recommending a particular retirement option, or course of action, over another. You can also get tips before you buy an annuity and information on the other options for retirement by using the links below.

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