What is an annuity?

An annuity is a type of insurance product that, in exchange for some or all of your pension savings, guarantees to pay you an income for the rest of your life.

You can also get fixed term annuities from some providers, but the information on this page relates to lifetime annuities.

The benefits of an annuity

  • You won’t need to worry about running out of money or monitoring the performance of your investments.
  • You can be secure in the knowledge that your income will be paid throughout your life regardless of how long you live.
  • There are a range of options you can include to provide benefits on your death or to protect your income against inflation.
  • If you’re in poor health, or lead a lifestyle that could shorten your life expectancy, you could receive a higher income.

The risks associated with an annuity

  • Once you’ve bought an annuity, it’s an irreversible decision. You can’t cash it in later or transfer to another company.
  • You can’t vary the income you receive if your circumstances change.
  • When you die your income will usually stop and nothing will be paid to your family or estate.
  • You can choose to inflation proof your income, but if you don’t the money you receive on a regular basis is likely to buy less in the future.
  • Over the course of your retirement, you may receive a smaller income than if you had chosen an investment based product, such as a drawdown.

What happens when you die

When you die your payments will stop, but you can add options to protect your loved ones. The main options you can add are:

  • Value protection. This provides a lump sum to a beneficiary or your estate when you die. The amount paid depends on the percentage of the annuity purchase price you protect, and how much income has been paid when you die. If you die before age 75 and you selected to protect your annuity with value protection, the lump sum would be paid to your beneficiaries tax-free up to the lump sum and death benefit allowance.
  • For policies that are taken after 6 April 2024, any value protection lump sum payment would count towards your lump sum and death benefit allowance. This is a limit on all the tax-free lump sums and death benefit lump sums you can take, and is normally £1,073,100. This limit could be higher if you have protection from the lifetime allowance. If the value protection lump sum or part of value protection lump sum exceeded the limit the amount over the limit would be taxable at the recipient’s marginal rate of tax.
  • Guarantee period. This means that income payments will continue to be paid for a specific time period. If you die before age 75 and you’ve chosen to protect the annuity by adding a dependant’s pension or a guarantee period, the income under the dependant’s pension or guarantee period would continue to either the dependant or your beneficiaries tax-free.
  • Joint income. Part or all of your income payments can continue to be paid after your death to your spouse, partner or other dependant.
  • If you died on or after the age of 75, the money is taxable at the marginal rate of the person receiving the income or lump sum. This means that the income or lump sum is added to any other income they may receive, and tax is calculated on the total.

How to find the best annuity deal

You don’t have to accept the offer your pension provider sends you. You have the right to shop around to find the insurance company that will offer you the highest income.

Through our annuity comparison service we can help you make sense of your options and help you to compare a range of annuities across a number of providers. You can contact us on 01737 233413, Monday to Friday, 9am to 8pm.

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