Updated August 2018

Your 5 Minute Guide to Annuities

What is an Annuity?

An Annuity is a type of retirement income product provided by insurance companies that you can buy with some or all of your pension fund, after usually taking up to 25% as a tax-free lump sum.

You can also purchase an Annuity from a lump sum built up outside of your pension fund, known as a Purchase Life Annuity (PLA). Annuities are commonly designed to provide you with a guaranteed income for either the rest of your life or a set period. The amount you receive from an Annuity will be taxed as income. With a PLA, only the interest element is taxed as income. How much you pay will be dependent on your total income and the income tax rate that applies to you.

You should select a provider that can offer the particular options you require because once you buy an annuity, under current legislation, you have very little time to change your mind.

What are the different types of Annuity?

  • Lifetime Annuity:
    A guaranteed income will be provided for life.
  • Impaired, Lifestyle or Enhanced Annuity:
    Your guaranteed income may be higher if your health or lifestyle could shorten your lifespan.
  • Fixed-term Annuity
    Use part of your pension fund to buy a guaranteed income for a set-term, usually between 3 to 30 years, leaving the remainder invested.
  • Investment Linked Annuity
    Income is not guaranteed and can rise and fall in line with the value of the investments you choose when you purchase the product. This is seen as a riskier product.

What are the different options available under some of these Annuities?

  • Single or Joint:
    Income can stop when you die (single) or can provide an income to a spouse, civil partner or nominated beneficiary after you die (joint). This income will usually be lower.
  • Level or Increasing:
    Level pays the same income each year, so even low levels of inflation could reduce your standard of living. Increasing starts lower but rises over time by either a set amount or inflation, Consumer Price Inflation (CPI).
  • Guarantee Period:
    Form of protection which guarantees your income will continue for a set period of time, even if you die during that time.
  • Value Protection:
    Another form of protection. Ensures a lump sum is returned to your beneficiaries if you die before you receive back, as income, the full amount used to purchase your annuity. A variant of this is a Maturity Value available under a Fixed Term Annuity.

What Income Can I Expect?

The amount of retirement income you get from an Annuity will depend on a number of factors, such as:

  • Your health and lifestyle
  • The size of your pension fund
  • Annuity rates at the time you buy
  • Where you expect to live when you retire
  • How old you are when you buy your annuity
  • Which annuity type, income options and features you choose

Is an Annuity right for me?

If you want the peace of mind or are worried about your money running out, an Annuity may be right for you. The Annuity you consider should be one that suits your particular circumstances, lifestyle and plans for the future.

You do not have to buy your existing provider’s annuity product. You may get better rates from a different provider. But an Annuity may not be the right choice for you if you are unsure about committing to a guaranteed lifetime income product now, as it may not provide the level of income you need in the future.

This information is intended to provide a general overview of Annuities and is not comprehensive. It does not offer specific personal advice and is based on our understanding of current taxation, legislation and HM Revenue & Customs practice as at August 2018, all of which may be subject to change.

Let's Talk About You

We like to keep things simple for you. Just leave your name and phone number and we will call you back.