Buying an Annuity | Money Saving Advisors
Understand the process of purchasing an annuity to convert your pension savings into guaranteed income.
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Putting your pension to work
An annuity turns your pension pot into a steady income for the rest of your life. For many people, it brings peace of mind knowing money will keep coming in no matter how long retirement lasts. Here's what you need to know if you're considering buying one.
What types of annuities can you buy?
Choosing an annuity is all about deciding how you want to access your pension savings and how much of your fund you're willing to commit. Here are the main options:
Lifetime annuity
This pays you a guaranteed annuity income for life. You can choose a level income (same amount each year) or an escalating annuity, which increases over time.
Fixed-term annuity
This pays a guaranteed income for a set number of years. It avoids using your whole pension pot or committing for life. At the end, you may receive a lump sum (or tax-free cash) or you might decide to reinvest.
Enhanced or impaired life annuity
If you have certain health conditions or lifestyle factors, you could qualify for this higher income option. Providers might offer improved annuity rates based on your reduced life expectancy.
Is an annuity right for you?
Annuities aren't a perfect fit for everyone. Here are some key points to think through before making your decision:
Your health and lifestyle
These can significantly affect your annuity rates, especially if you fall below the average life expectancy. Being honest about any medical conditions could result in a better income.
Leaving something behind
Annuities typically stop when you die. If you want to provide for loved ones, you can include guarantees or value protection in your plan, though this may reduce the income you receive.
Inflation protection
An escalating annuity that increases with inflation (e.g. linked to the Retail Price Index) can help maintain your spending power. Bear in mind that the starting payments are often lower.
Shop around
Different providers offer different rates, so don't settle for the first quote you find. And remember, depending on how much income you make, you may still pay income tax on your annuity payments.
Summing up
Buying an annuity is a big decision that can shape your retirement. It offers stability and the comfort of knowing you'll never outlive your income. But it's not one-size-fits-all - your health, goals and preferences matter. Get advice, compare options, and make sure the choice feels right for you.
Frequently Asked Questions
Can I change my annuity later?
In most cases, no - once you've bought an annuity, the terms are locked in for life. This includes the income amount, frequency, and any extra features like inflation protection or spousal benefits. It's one of the biggest differences between annuities and other retirement options like drawdown, where you have flexibility to change course.
How much income will I get from an annuity?
The income you receive depends on several factors: your age, the size of your pension fund, interest rates, your health and lifestyle, and the type of annuity you choose. An older person with a medical condition could get a higher rate with an enhanced annuity, while an increasing annuity that rises with inflation could lower your starting income. Always compare quotes - even a small difference can add up to thousands over the years.
Is an annuity better than pension drawdown?
It really depends on your retirement goals and attitude to risk. An annuity gives you a guaranteed income for life - you know exactly how much you'll get and for how long, which can bring real peace of mind. Pension drawdown, on the other hand, gives you control over your pension pot, letting you decide how much income to take and when - but your money's invested, so there's a risk it could run out.
Do I have to buy an annuity at retirement?
No - you're not required to buy an annuity at retirement. In fact, since 2015's pension freedoms, you have more flexibility than ever. You can leave your pension invested, take lump sums, choose drawdown, or combine options. There's no fixed deadline for buying an annuity either - some people wait until their 70s or even 80s, when they may qualify for a better rate due to age or health changes.
What happens to my annuity when I die?
In a standard annuity, payments stop when you pass away, and there's no money returned to your estate. But you can build in extra protection like a joint-life annuity that continues to pay a spouse or partner after you die, or a guarantee period, so your income continues for a time (e.g. 10 years) even if you die early. You could also add a value protection feature, which pays out the unused portion. These options reduce your income slightly while you're alive but can add reassurance.
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