What are annuities?

Annuities can give you a guaranteed income for a fixed number of years or for the rest of your life. Provided by insurance companies, annuities give you the certainty of an income for your retirement as well as the option to pass on this income to a loved one in the case of your death.

It’s one of the many options you have for using your pension pot. You can choose to use part of your pension pot to purchase an annuity and take up to 25% as tax-free cash (termed a ‘pension commencement lump sum’).

There are different types of annuity available, each with different terms and options.

How much can I earn?

How much income you’ll get from an annuity depends on:

  • Your age when the annuity starts
  • The term of the annuity
  • The purchase price
  • Interest rates and/ or anticipated future investment returns
  • The options you select to be included

Some providers also take into consideration other factors, such as whether or not you smoke, the general state of your health and where you live to determine what annuity income they’ll offer you.

What is the purchase price?

The purchase price (or ‘investment total’) can vary wildly from annuity to annuity depending on the annual payment, length of payout period and interest rate. Make sure you shop around to get the best deal for you.

As with any investment, do your research before you decide which option to go for; you might want to consult an online annuity comparison service, such as the Money Advice Service’s annuity comparison tool, and where necessary seek out the guidance of a financial adviser.

Annuity terms

Annuities come in two terms: lifetime and fixed term.

Lifetime annuities pay you an income for life, and can include investment-linked annuities. They also allow you to nominate a beneficiary to receive the income of your annuity after you pass.

Fixed-term annuities, as you might expect, pay an income for a set period of time (normally five to ten years) after which they pay out a‘maturity amount’ that you can take out as cash or use to buy another retirement income product.

Get your free report

Want more information on UK investing?

Download your copy of our free guide. Featuring an analysis of UK investor trends, investment case studies and a four-page EIS cheat sheet.

Get your free guide