If you’re planning for retirement, chances are, you’ll be thinking about your finances and how you’re going to live the rest of your life in comfort.

A pension lifetime annuity is one option available to you. It would provide you with a guaranteed income for the rest of your life, giving you peace of mind knowing you can’t outlive your money.

Should I buy an annuity?

If you need, or prefer, the certainty of a guaranteed income for life, then a lifetime annuity may be right for you. You can tailor your annuity to suit your needs and add benefits to leave something behind after you die.

Lifetime annuities may not be suitable if you need more flexibility around how much income you receive on a regular basis. Or you want to have future access to (s). If this is the case, you may wish to withdraw your savings gradually through pension drawdown.

Bear in mind that income derived from pension drawdown is not guaranteed for life. It can carry greater risks as your money will be invested in the stock market, so your fund may fall in value. On the other hand, investment growth can provide higher returns and see your pension grow in value. You should assess your personal attitude to risk and your priorities in retirement.

Or you could look into a blended approach where you buy an annuity with part of your pension fund and drawdown with the rest.

You can read more about the pros and cons of purchasing an annuity here.

Buying an annuity

Purchasing a lifetime annuity is a big decision and it can be a daunting task. We hope the following step-by-step guide can help you through the process.

Step 1 – Talk to your current pension provider

At least six weeks before your pension policy retirement date, your current pension provider will usually contact you. They will give you details of your pension fund and an idea of the income your savings could generate with a lifetime annuity. At this point, if you haven’t already done so, it would be a good idea to calculate your outgoings. This is so you can decide what level of income you will need to live out the rest of your life comfortably.

Your pension provider has a regulatory obligation to tell you whether their offer is the best in the market or if you could get a better deal elsewhere. If they are not the best in the market, they won’t necessarily tell you which provider is offering a higher rate. So it’s up to you to search the market for the best annuity rates.

Step 2 – Find the best annuity rates by comparing the whole of market

It’s important to remember that you don’t have to buy your annuity from your current pension provider. You could receive a higher income by buying elsewhere.

To ensure you get the best annuity rate available based on your needs, you should compare annuity rates across the whole of market.

You’ve spoken to your pension provider and found out what they are willing to offer. Now it is time to compare annuity rates online to see if you can secure a higher income for your retirement. Bear in mind that not all annuity providers offer the same options, so always check their policy details before making your decision.

With Annuity Ready, you can compare annuity rates from all providers in the open market. So you can find the best deals without making lots of phone calls to individual annuity providers.

Step 3 – See if you are eligible for an enhanced annuity

When applying for your lifetime annuity, having certain medical conditions could work in your favour. Enhanced annuities pay a higher income to those with medical problems or unhealthy lifestyle habits that could shorten life expectancy.

According to industry sources, around 20% of all annuities sold are enhanced. But, as many as 60% of all annuity applicants could qualify for an uplift in income with an enhanced annuity. So, it’s always worth checking to see if you are eligible. It may be easier than you think to meet the criteria with many qualifying conditions common in later life, such as high blood pressure and diabetes.

Step 4 – Think about your dependants

Normally when you die, your annuity income payments will stop. So, if you have a spouse or partner who relies on you financially, how would they cope if you were to die?

Joint life annuities continue to pay out after your death, for the rest of your surviving named spouse or partner’s life. The income will continue to be paid until you have both passed away. You can take out a joint annuity with a named spouse, civil partner or financially dependent partner.

You can choose for 100% of your income to continue after your death or select a smaller percentage. Choosing to take out a joint life annuity will lower your income payments. But failing to protect your spouse or partner could leave them with financial worries at an already difficult time.

Step 5 – Consider protecting your money

If you would like to leave something behind for your loved ones, you could consider protecting your annuity income. You can do this by adding death benefits such as value protection or a guarantee period.

Value protection allows you to protect all or a proportion of the pension fund you used to buy your annuity. So, if you were to die without having received the full value of the amount protected, this option can return a lump sum to your estate.

For example, suppose you paid £100,000 for your annuity and chose to protect 50% (£50,000). If you had received £40,000 in annuity income payments by the time of your death your beneficiary or estate would receive a lump sum payment of £10,000.

Alternatively, a guarantee period can ensure your annuity income payments will be made for a chosen length of time. For example, say you have set a guarantee period of 10 years, and you die after 5 year. Your annuity income will continue to be paid to your named beneficiary or estate for a further 5 years after your death. Choosing to add death benefits to your annuity will affect the amount of income you receive.

You can learn more about protecting your money with our guide ‘what happens to my annuity when I die?’.

Step 6 – Think about inflation

The rate you get when you buy your annuity is fixed for life. So, it will not rise or fall with interest rates set by the Bank of England. This means the spending power of your annuity income may lessen as time goes by if inflation rates increase.

To gain some protection against this, you can choose for your annuity income to increase year on year. There are three ways you can choose for your income to increase:

  • in line with inflation rates
  • by a variable amount capped at 5%
  • by a fixed amount of your choosing up to 10%

The greater the increase you select, the lower your initial income will be. It may take many years for an increasing income to reach the same level as you would receive through a non-increasing income.

Step 7 – Choose your payment frequency

Your annuity income payments can be paid to you on a monthly, quarterly, half-yearly or annual basis. You can also choose to be paid in advance or in arrears.

You will need to decide this at the point of purchasing your annuity. Your decision cannot be changed once you start to receive your income.

You will usually receive a higher annuity income if you choose to take your annuity payments in arrears, rather than in advance. You may also receive more income by choosing to be paid annually in arrears rather than monthly or quarterly.

Step 8 – Be certain of your decision

When you buy a lifetime annuity, you’ll have an initial cooling off period, usually 30 days. After this time, you cannot change your mind or cash in your annuity. You should consider taking advantage of your ‘right to guidance’ when accessing your pension funds. You can access this via Pension Wise, a government service from MoneyHelper.

Through the Pension Wise service, you can arrange a free appointment. This can be either face-to-face or over the phone and a pension specialist will talk you through your options. This guidance is free, impartial, and available to anyone over 50 years old with a personal or workplace pension.

0800 011 3797

Bear in mind, Pension Wise will provide general guidance and not financial advice tailored to your specific needs. For personal recommendations, you may wish to seek advice from an individual financial adviser.

Step 9 – Seek advice if you need it

Buying an annuity is a major decision that will affect your financial situation for the rest of your life. So it may be worth paying for professional advice. While Annuity Ready can provide guidance during the application process, we cannot offer financial advice or tell you if an annuity is right for you.

An independent financial adviser will talk through all the options available to you. They will give you personalised recommendations tailored to your needs. You can search MoneyHelper’s retirement adviser directory to find an adviser.

Step 10 – Receive your annuity income

If you’ve found a better deal with another provider and decide to buy from them, your current pension provider will release your funds to them. Your annuity should then be set up within 30 days.

You can now enjoy your retirement with peace of mind, knowing that you have a guaranteed income for the rest of your life.

If you’d like to read more about lifetime annuities and find out the answers to frequently asked questions, see our ‘Annuities Explained’ page. It features handy guides to help you make sense of your retirement options.

If you’re ready to begin comparing annuity rates, and incomes, you can get started here.