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What is an annuity?

An annuity is an insurance policy that you can buy with a lump sum to receive a guaranteed regular income.

There are different types of annuities available. These can provide you with different levels of income. It’s important to consider your personal circumstances. This is to ensure you choose an annuity that’s right for you.

The most common type of pension annuity is known as a lifetime annuity. This provides you with the security of a guaranteed income stream for the rest of your life. Annuity Ready allows you to compare lifetime annuity quotes online.

Once you have bought an annuity you can’t change your mind after the 30-day cooling off period. So, it’s important to shop around for the right annuity for you. At Annuity Ready, we have built a lifetime annuity comparison tool. It gives you the convenience of shopping around in one place, without the need to complete many forms. Or make lots of phone calls. When you find a lifetime annuity that suits you, we help you buy your selected annuity product.

Find out more about the benefits of buying an annuity in our ‘What are the benefits of taking out an annuity?’ guide.

What is a lifetime annuity?

As you approach retirement, you will have some important decisions to make. These include what to do with your personal pension savings. A key consideration may be how to secure enough income to live the rest of your life in comfort.

One choice is to convert the pension funds you’ve built up into a guaranteed regular income. You can do this by buying what is called a ‘lifetime annuity’.

An annuity pays you a regular income. Once set up, a lifetime annuity is payable for the rest of your life, no matter how long you live. It’s important to take the time to consider all the annuity options available from different providers. This is because once you have bought an annuity you won't be able to change it. Annuity Ready offers comparison for all the lifetime annuity providers available in the open market.

The income you’ll receive will be subject to income tax. The amount of tax, if any, will depend on your individual circumstances and may change over time. Usually, the income is set up with an ‘emergency tax code’. HMRC will then confirm the correct tax code.

How does a lifetime annuity work?

In exchange for some or all the money in your pension fund, your lifetime annuity will pay you a regular guaranteed income for life. You will get the option to take up to 25% of your savings (or the amount you’re using to buy an annuity) as a tax-free lump sum. You can spend this as you like. Any tax-free cash taken, will reduce the amount of money left to buy your annuity. This will reduce your income payments.

Your regular annuity income payments will be subject to income tax. The annuity provider will usually deduct tax based on your tax code, before paying you the net income. Your annuity payments can be paid to you on a monthly, quarterly, six monthly, or annual basis. You can also choose to be paid at the start (in advance) or at the end (in arrears) of your selected payment frequency.

You will usually receive a higher annuity income if you choose to take your annuity payments in arrears, rather than in advance. You may also receive more income by choosing to be paid annually in arrears rather than monthly.

You can tailor your annuity to suit your needs. Options are available to support your loved ones after you die. You can choose to have your income increase annually, to keep up with inflation. Or by a fixed amount. You can select a joint annuity which will give a guaranteed income for both you and your named spouse or partner for the rest of your lives. You should bear in mind that adding some of these benefits to your annuity can have significant impact on the level of income you receive.

Should I get a lifetime annuity?

Do you need, or prefer, the certainty of a guaranteed retirement income with your pension savings? If yes, then a lifetime annuity may be right for you. You have the right to shop around with your personal pension fund. You do not need to take an annuity with the same company you saved your pension with. You could find a higher income with a different provider. Lifetime annuities may not be suitable if you need flexibility with your income or want to have future access to all your pension fund.

What is a joint lifetime annuity?

A joint life annuity provides you with a guaranteed income for life. It's like a single life annuity but you can include your surviving named spouse, civil partner or financial dependant partner. So should you die before them they would then receive a regular income for the rest of their lives. The income paid to your named spouse or partner will be a proportion of the income you were receiving. You decide this at the point of buying your joint-lifetime annuity. Normally, the higher the proportion you set, the lower your retirement income will be. To find out more read our guide ‘Single vs joint annuities’.

Should I get a joint lifetime annuity?

A joint lifetime annuity can be a suitable choice for those with spouses or partners who do not have their own pension arrangements. Or, if their pension payments won’t cover their long-term financial needs. Your income will usually be lower if you include a joint lifetime annuity. So you should also consider your own income needs.

Where can I buy a lifetime annuity?

You don’t have to buy your lifetime annuity from your current pension provider. Your pension provider will recommend that you shop around and compare quotes. This is so you can choose an annuity that meets your needs. This may result in a higher income from another provider. It also allows you to look at all the different options available.

With Annuity Ready, we will help you get competitive quotes from our panel of annuity providers. Why not compare annuity quotes with different options to find one that meets your needs.

If you have several pension plans you may wish to combine them now to buy one annuity. You can include plans with different providers.

There are different types of annuities available on the market. But not all providers offer the full range of options. You need to make sure that the one you buy is the one that best suits your circumstances.

Some pensions have valuable guaranteed benefits such as guaranteed annuity rates or options. So, check with your current provider that you are not giving up any of these by buying your annuity from another provider.

If you’re invested in a With Profits Fund, a Market Value Reduction (MVR) may apply when you take your retirement benefits. This MVR could be more, or less, than the pension providers illustration. Taking your fund on the pension plan’s stated retirement date may avoid this reduction. Check with your current pension provider.

Is an annuity the same as a pension?

No, a pension fund is something you save into throughout your life, and you can use to help fund your retirement. An annuity can be bought with a pension fund to provide you with a regular guaranteed income.

Is my money safe in an annuity?

Once you have bought a lifetime annuity and it is set up, it will be payable for the rest of your life. This is the case no matter how long you live. This makes lifetime annuities a suitable option for those needing a guaranteed regular income for life. Alternatives, such as pension drawdown, need you to actively manage your pension fund. If your investment funds fall in value, you could have insufficient income to sustain your income in retirement.

Find out more about how annuities are protected, and the death benefits you can add to secure your funds by reading our guide 'Are annuities safe?'.

Can I use my annuity to pay for care home fees?

Unlike immediate care annuities, pension lifetime annuities are not designed to cover care home fees. But there is no restriction on how you use your annuity income so you could use it to help with the cost of care.

What is an enhanced annuity?

If you have certain medical conditions or are overweight or smoke, you could be eligible for, what is called an ‘enhanced annuity’. An enhanced annuity will provide you with a higher income compared to a standard annuity. It is paid for life even if your future health improves or you change your lifestyle.

You can find out more about enhanced annuities in our ‘What is an enhanced annuity?’ guide.

What medical conditions qualify for an enhanced annuity?

Generally, medical conditions that could reduce your life expectancy make you eligible for an enhanced annuity. An enhanced lifetime annuity means you receive a higher income compared to a standard annuity. This income is paid for life, even if your health improves or your lifestyle changes.

To see if you are eligible for an enhanced annuity, you can compare lifetime annuity quotes. We compare providers across the whole annuity market with Annuity Ready.

How much income will I receive from my lifetime annuity?

You can tailor your annuity to meet your needs, including to support another person after you die and /or an increasing income. The options you choose will affect the income you’ll receive. Other factors include:

With Annuity Ready, you can get competitive quotes from our whole of market panel of annuity providers.

How much do annuities pay?

The amount of annuity income you receive will depend on the annuity rate you were offered by your chosen provider. This is based on the options you selected when buying your lifetime annuity.

Want to find out how much annuity income you could get? You can use our online form to compare annuity rates from all providers in the annuity open market.

What happens to my annuity when I die?

If you have a standard single lifetime annuity, with no added options, when you die your income payments will stop. No money will be paid to your loved ones. You can, however, add features to your annuity to give you the choice to leave something behind after your death.

These features can include value protection or guarantee periods. Plus, you could choose to include an annuity payable to a named second annuitant should you die before them. The second annuitant could be your spouse or partner. A partner can be a registered civil partner or financially dependent partner.

You can find out more about these features in our guide ‘What happens to my annuity after I die?’.

What is a guarantee period (also known as minimum guaranteed payment period)?

A pension lifetime annuity provides a guaranteed income for the rest of your life. When you die the annuity dies with you unless you select a death benefit or second annuitant.

A guarantee period is a death benefit. If added to your annuity it means payments will be made for a certain length of time. So, if you include a guarantee period and die within the selected period, your annuity income will continue to be paid for the rest of that period. It will be paid to your named beneficiary or estate. A guarantee period is set when you buy your annuity. You can choose a period between 1 and 30 years, although some providers will only offer 5 or 10 years.

So, if you chose a 10-year guarantee period and died after 5 years. Your annuity income will continue to be paid to your named beneficiary or estate for a further 5 years after your death. If you die after the selected 10-year guarantee period, nothing is payable. Unless you also selected a joint life annuity, and your partner survives you.

Bear in mind, the longer the guarantee period you choose, the lower your annuity income is likely to be. This is because the provider is guaranteeing to pay an income for that minimum period. You can compare quotes with and without the death benefit.

What is value protection?

Value protection, also known as capital protection, is an alternative death benefit option. It allows you to protect all, or part of the pension fund used to buy your pension annuity. Value protection may return a lump sum to your beneficiaries or estate when you (or if selected, the second annuitant) die. However, payment is only for the protected part (pre-selected) of your original pension fund less any income already received.

How does value protection work?

If the only option selected is value protection, when you die, your estate or beneficiaries may receive a lump sum. This sum will be the difference between the chosen protected percentage of the pension fund and the total income you received before you died.

For example, you paid £100,000 for your annuity and selected 50% value protection (£50,000). At the time of your passing you had received income payments totalling £40,000. Your chosen beneficiary or estate will receive £10,000 as a lump sum.

If your policy has already paid out more than the protected amount, there will be no lump sum paid out after your death.

Value protection and joint life annuities – what happens after your death?
Some providers allow value protection to be payable after your death (instead of after the second annuitant’s death). If selected, then in the above example, if you had chosen to leave:

• 50% value protection and
• 50% income to your surviving spouse or partner

Assuming the total income payments received was £40,000 by the time of your passing,

• Your chosen beneficiary or estate would receive a £10,000 lump sum.
• Your named spouse (or civil partner or financially dependent partner) will then start to receive an annual income based on 50% of your income.

Value protection and joint life annuities – what happens after you both die?
Some providers allow value protection to be payable after both of you die (instead of after the first annuitant’s death). If selected, the value protection payable takes account of all payments made to both you and your spouse.

• 50% value protection and
• 50% income to your surviving spouse or partner

In the above example, if you paid £100,000 for your annuity and selected to leave:

• 50% of your income to your spouse and
• 50% value protection (£50,000)

What does value protection cost?

The cost of adding value protection to your annuity depends on several factors. These include your age and health history. Adding value protection to your annuity will mean your income will be lower than if you chose no protection. It’s always worth getting more quotes if you are considering this choice. This will allow you to compare the impact on your income and consider all the options available to you.

Should I choose to protect my annuity?

If you die in the early years of your annuity plan, the total income you receive may be less than the pension fund used to buy the annuity. Selecting a death benefit, either value protection or a guarantee period, allows you some protection against this.

Value protection may be right for you if you wish to potentially leave a lump sum to your loved ones. You should consider:

• Your needs.
• The impact of selecting the options on your income level.
• Other options available such as a guarantee period.

You should read the providers key features for their details on value protection as well as the tax implications.

Consider if you have someone who relies on your income. Value protection or a guarantee period could offer them some financial support after your death. If considering these options, it’s important to check the impact on your income.

How much money do I need to start an annuity?

Our comparison is available to those with a pension fund of over £2,000. This figure is before any tax-free cash has been taken.

Do annuities earn interest?

No. When you buy a lifetime annuity, your annuity rate is fixed and will not rise or fall with the Bank of England Base Rate. Annuity rates may rise in the future, but you won’t benefit from this if your annuity policy is already being paid. However, your annuity income will be protected against any future fall in annuity rates.

You can opt for your annuity to increase annually:

• To keep up with inflation.
• By the lower of a variable amount up to 5% or the Retail Price Index (known as Limited Price Index). Or
• By a fixed amount of your choice up to 10%.

What is the maximum age you can buy an annuity?

If you are aged 55 to 84 years and 9 months, you can compare lifetime annuities online with Annuity Ready.

When is the best time to buy an annuity?

You can access your pension funds from age 55 and you don't need to retire to do so. Annuity providers will usually pay a higher income the older you are when you buy. But changes in the market may affect future annuity rates as well as the value of your pension fund.

Are annuities taxable?

The annuity income payments you receive will be subject to income tax. The annuity provider will normally deduct tax based on your tax code, before paying you the net income. You will not pay National Insurance contributions on your annuity income. Usually, the income is initially set up with an ‘emergency tax code’.

To find out more about how annuities are taxed read our guide ‘How is an annuity taxed?’.

How many annuities can I have?

There is no limit on the number of pensions you can have so there is no limit on the number of annuities you can have. You can use each pension fund to buy a separate annuity, so you have as many annuities as you do pension funds. This is provided they are over the value of £2,000, before any tax-free cash has been taken. Combining the pension funds may result in a higher annuity rate. Having more than one annuity allows you to choose different options for each annuity.

Can annuities be transferred?

Annuities are personal to you and cannot be transferred. If you have selected a joint life annuity, the annuity transfers to your spouse, partner or financially dependent partner following your death. However, when you buy a lifetime annuity, you’ll have a cooling off period, usually 30 days, in which to change your mind. After this time, you cannot alter or cash in your annuity if you decide it is not right for you.

How often are annuity income payments made?

Your annuity income payments can be paid on a monthly, quarterly, half-yearly or annual basis. You can choose to be paid in advance or in arrears. You will need to decide this at the point of buying your annuity. Your decision cannot be altered once your payments have started.

You will usually receive a higher annuity income if you choose to take your annuity payments in arrears, rather than in advance. You may also receive more income by choosing to be paid annually rather than monthly.

How long does it take to get money from my annuity?

If you decide to buy a lifetime annuity, your current pension provider will release your funds to your annuity provider. Your annuity should then be set up within 30 days. You should receive your first annuity payment in line with the payment options you selected at the point of purchase. Your annuity provider may request extra information. If they do, it is important to provide it as soon as possible to avoid delays.

How do I get advice about annuities?

At Annuity Ready, our friendly customer services team can provide you with support. Whether you need help with your application or online quotes, we can guide you through the process from start to finish. As a non-advice service, we are unable to give you financial advice.

MoneyHelper (formerly known as The Money and Pensions Service) is a free and impartial guidance service set up by the Government. It brings together three existing bodies of financial guidance: the Money Advice Service, The Pensions Advisory Service and Pension Wise. Further, it offers:

• Tailored guidance to explain your options. This can help you decide how to make the best of your pension savings. This is available online, over the telephone or face-to face.
• Information about the tax implications of different options.
• Details on other options for your pension funds.
• Tips on how to shop around.

You can visit their website www.moneyhelper.org.uk or call them on 0800 011 3797.

If you need advice, we recommend you speak to a retirement adviser.

If you don’t have a retirement adviser, you can find one in your area by entering your postcode on www.moneyhelper.org.uk

See our guide ‘Do I need to seek advice before I buy an annuity?’ for more information.

If you’d like to read more about pension lifetime annuities, see our ‘Annuities Explained’ page. This includes a range of handy guides to help you make sense of your retirement options. Or, if you’re ready compare annuity rates now.