There are a few different types of annuity on the market. If you’re considering purchasing one, it’s important to understand the differences between them. This is because when you buy an annuity (after the cooling off period, usually 30 days) you will not be able to change your mind or cash it in if you decide an annuity is not right for you.

In this guide we’ll look at the different types of annuity available to help you decide if an annuity is right for you.

Types of annuity

The two most popular types of annuity in the UK are lifetime annuities and fixed term annuities.

Lifetime annuity

A lifetime annuity pays you a guaranteed income for the rest of your life in exchange for some, or all of, the money in your pension fund. This can provide you with security and peace of mind as you will never outlive your income.

Fill in one form to compare annuities from all online providers. You'll also have the option to request quotes from offline providers so you can compare annuities from all providers in the UK open market.

Fixed term annuity

A fixed term annuity is like a lifetime annuity but pays an income for a fixed period of time, or until you die, if this is earlier. At the end of the specified period, you can usually choose to reinvest the remaining amount (called a maturity value) into another retirement income product or take the money out of your pension. The maturity value is agreed when you take out the annuity, so you'll know how much money you'll be left with at the end of your fixed term period.

This option gives you more flexibility than a lifetime annuity but does come with some risks. For example, if annuity rates have fallen by the time your fixed term ends, the amount you receive at the end may not provide you with the income you need. On the other hand, you may benefit if annuity rates increase.

Annuity Ready are unable to provide quotes for fixed term annuities.

Other types of lifetime annuity

At Annuity Ready, we can help you compare lifetime annuities from all providers in the open market. Here we’ll look at the other types of lifetime annuity available and let you know if we’re able to give you a quote for each one:

Enhanced annuity

An enhanced annuity (sometimes known as an impaired annuity) is a type of lifetime annuity that will provide you with an increased income. You may be eligible for an enhanced annuity if you have been diagnosed with an illness that could reduce your life expectancy, and/or you are overweight or smoke. Learn more about enhanced annuities by reading our guide ‘What is an enhanced annuity?’.

When getting an online quote with Annuity Ready you will be asked questions about your lifestyle, physique and health. These will be used to determine if you are eligible for an enhanced annuity. You won’t need a medical assessment to get a quote, so all you need to do is answer these questions accurately. This is essential, as later in the process you may be required to provide supporting evidence from your doctor. This is to prove to the annuity provider that you are living with certain health conditions.

To avoid delays, providers may carry out health checks after your annuity payments have started. If the information you provided at the time you took out your annuity is not verified by your doctor, your income could be reduced.

Joint life annuity

A joint life annuity will pay you a guaranteed income for life, a proportion of which will then continue to be paid to your designated spouse, partner or financially dependent partner if you die before them. The income paid to your spouse, partner or financial dependant will be a proportion of the income you were receiving before your death. You decide what this proportion will be when buying your annuity. The higher the proportion you set, the lower your retirement income will be.

This option may be suitable for you if you need to provide an income for your partner after your death. Bear in mind, the income you receive may be lower if you select a joint life annuity. This is because the provider agrees to pay out for the duration of two lives, rather than one life with a single annuity.

To find out more about the differences between joint and single life annuities, take a look at our guide ‘Single vs joint life annuities’.

When getting an online quote with Annuity Ready, in the 'Your Pension Options' section, you will be asked, ‘Do you need your income to be paid to your surviving spouse, civil partner or financially dependent partner after your death?’. To compare joint annuities, select ‘Yes’ then select the proportion to be payable.

Escalating annuity

When you buy a lifetime annuity, you can choose to have it increase in line with inflation, increase 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 up to 10%. This is sometimes known as an escalating annuity and can help towards protecting your annuity income from any rising cost of living.

When getting an online quote with Annuity Ready, in the 'Your Pension Options' section, you will be asked, ‘Do you need your annuity income to increase annually?’. To compare escalating annuities, select ‘Yes’ then select the type of annual increase you would like.

Guaranteed annuity period (Guaranteed minimum payment period)

When you take out an annuity you will have the option for your income payments to be payable for a minimum number of years, even if you die. This is sometimes known as a guaranteed minimum payment period or guaranteed annuity period. You can choose a guaranteed payment period of between 1 and 30 years. However, some providers will only offer a 5 or 10 year guaranteed payment period. For example, if you selected a single life annuity, chose to add a 10 year guaranteed payment period and die 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 10 year period, nothing is payable after your death (unless you also selected a joint life annuity, and your partner survives you). The longer the guaranteed payment period you choose, the lower your annuity income is likely to be. This is because it is guaranteeing to be paid for that minimum period.

When getting an online quote with Annuity Ready, in the 'Your Pension Options' section, you will be asked, ‘Do you need Value Protection or a Guarantee Period on your annuity?’. To compare annuities payable for a minimum guaranteed period, select ‘Guarantee Period’ then select the length of your desired guarantee period.

Value protected annuity (Value protection)

Value protection is another death benefit you can add when buying an annuity. Occasionally known as a value protected annuity, adding this option allows you to protect all or part of the pension fund used to buy your annuity. If you die without having received the selected protected proportion of your original annuity purchase price (via total payments before tax), value protection allows a lump sum to be payable to your named beneficiaries or estate.

For example, if you paid £100,000 for your single life annuity and selected 50% value protection (£50,000). If the total of the income payments you have received was £40,000 at the time of your passing, your chosen beneficiary or estate will receive £10,000 as a lump sum.

Adding value protection to your annuity normally reduces the amount of income you receive.

When getting an online quote with Annuity Ready, in the 'Your Pension Options' section, you will be asked, ‘Do you need Value Protection or a Guarantee Period on your annuity?’. To compare value protected annuities, select ‘Value Protection’ then choose the percentage of value protection you would like. You will also need to select whether you want it to end in the event of your death or after both you and your partner have died, known as the last event.

Investment-linked annuity

An investment-linked annuity is another type of lifetime annuity. With an investment-linked annuity you can benefit from growth in the stock market. But, your income could also fall in times of poor stock market performance. If you'd prefer a guaranteed income, you may wish to consider a standard lifetime annuity.

Annuity Ready are unable to provide quotes for investment-linked annuities.

Other types of annuity

If you don’t have a pension fund you can buy an annuity with a cash lump sum. This is known as a purchased life annuity. Or, you could buy a purchased life annuity with your pension commencement lump sum (PCLS). This is the 25% of your pension fund that you’re normally entitled to take tax-free at the start of your retirement. Purchased life annuities can be bought for life or a fixed term and are available with the same options as pension annuities. Purchased life annuities may offer some tax advantages because it's assumed that you have already paid tax on the cash used to buy your annuity. So, part of your purchased life annuity income is tax-free.

Annuity Ready are unable to provide quotes for purchased life annuities.

You can compare lifetime annuities using our online form and adjust your options to see how they affect the annuity income you are offered.

If you’re ready, compare annuity quotes now.