Your Annuity Options Explained

Once you buy an annuity, you can’t change your mind — so it’s important to understand your options before you decide. Broadly, there are two main routes: a Lifetime Annuity, which provides a guaranteed income for the rest of your life, or a Fixed Term Annuity, which provides a guaranteed income for a set number of years before paying out a maturity value. Below we explain both in detail, along with the choices within each.

Lifetime Annuities

A Lifetime Annuity converts your pension pot into a guaranteed income for the rest of your life, no matter how long you live. Within a Lifetime Annuity, you’ll need to make several choices that affect how much income you receive and what happens to it after you die.

Single life or joint life?

A single life annuity pays an income to you only, stopping when you die — this accounts for around two-thirds of annuities sold, and pays the highest starting income. A joint life annuity continues paying an income to your spouse or partner after you die, usually at 50%, 66% or 100% of the original amount. The starting income is lower than single life, but it protects a partner who may outlive you.

Level or escalating?

A level annuity pays the same fixed amount every year — giving you the highest income at the start, though inflation gradually erodes its real value over time. An escalating annuity increases each year, either by a fixed percentage (e.g. 3%) or in line with inflation (RPI or CPI). Escalating annuities start much lower, often around half the level annuity rate, and can take 15 to 20 years to overtake it.

Guarantee periods

A guarantee period ensures payments continue to a nominated beneficiary for a set number of years (typically 1 to 30) if you die shortly after the annuity starts, protecting against an early death reducing the overall value paid out.

Investment-linked and variable annuities

These link your income to investment performance, so payments can rise or fall over time. Variable annuities offer a guaranteed minimum income for more certainty, but both are complex products that aren’t suitable for everyone.

Enhanced annuities

Standard annuity rates assume average life expectancy. If you have a medical condition, take regular medication, smoke, or your alcohol consumption is above average, you could qualify for an Enhanced Annuity — paying up to 60% more income for life. Find out more about Enhanced Annuities →

Fixed Term Annuities

A Fixed Term Annuity pays a guaranteed income for a set period, typically 1 to 25 years, rather than for life. At the end of the term, you receive a Guaranteed Maturity Value (GMV), which you can use to buy a Lifetime Annuity, start another Fixed Term Annuity, move into Flexi-access Drawdown, or take as a taxable lump sum.

This gives you the flexibility to review your options again at the end of the term, rather than committing to a single rate for life — useful if you think annuity rates may improve, or if your circumstances are likely to change. Death benefits can also be added to protect your family if you die during the term. Get a Fixed Term Annuity quote →

Don’t Forget to Shop Around

Whichever option you choose, you don’t have to buy it from your existing pension provider. Read our guide to shopping around → to see how much of a difference comparing the whole market can make.

What Should You Consider?

Choosing the right annuity depends on your personal circumstances. Before deciding, think about:

• Whether you want protection against inflation
• How much investment risk you’re prepared to take
• Whether a partner or dependant relies on your income
• How much flexibility you need once income starts
• What charges apply
• Whether you want to leave an inheritance for your family
• Your current state of health and smoker status

Because this is an irreversible decision, it’s always worth comparing the whole market and speaking to a specialist before you commit.

Ready to Compare Your Options?

Use our free calculator to compare quotes from the whole of the annuity market, or speak to a specialist directly.

We will not provide you with advice or recommendations as part of our annuity comparison service — we research the whole of the market and present you with the best available rates, and it is your decision how to proceed. Annuity purchase is irreversible, so we always recommend comparing the whole market before deciding.

Retirement Professionals Ltd is an appointed representative of pi financial ltd, authorised and regulated by the Financial Conduct Authority. FCA number 622943.