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What is an annuity?

An annuity is an insurance policy that you can buy with a pension lump sum to provide a guaranteed regular income.

There are different types of annuities available that can provide different levels of income for you. It’s important to consider your personal circumstances to help you choose an annuity that’s right for you.

The most common type of pension annuity is known as a lifetime annuity. This provides you with the security of a guaranteed income stream for the rest of your life. Annuity Ready allows you to compare lifetime annuity quotes online.

Once you have bought an annuity you can’t change your mind after the 30-day cooling off period, so it’s important to shop around for the right deal for you. At Annuity Ready, we have built a lifetime annuity comparison tool that gives you the convenience of shopping around in one place, without the need to complete multiple forms or make lots of phone calls. When you find a lifetime annuity that suits you, we help you purchase your selected annuity product.

Find out more about the benefits of purchasing an annuity in our ‘What are the benefits of taking out an annuity?’ guide.

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What is a lifetime annuity?

As you approach retirement, you will have some important decisions to make with your personal pension savings pot. A key consideration may be how to secure enough income to live the rest of your life in comfort.

One option is to convert the pension pot you’ve built up into a guaranteed regular income. You can do this by buying what is called a ‘lifetime annuity’.

Quite simply, an annuity pays you a regular income. Once in payment, a lifetime annuity is payable for the rest of your life, no matter how long you live. It’s important to take the time to consider all the annuity options available from different providers, as once purchased you can’t change the annuity. Annuity Ready offers comparison for all the lifetime annuity providers available in the open market.

The income you’ll receive will be subject to income tax. The amount of tax, if any, will depend on your individual circumstances and may change over time. Usually, the income is initially set up with an ‘emergency tax code’.

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How does a lifetime annuity work?

In exchange for some or all the money in your pension pot, your lifetime annuity will pay you a regular guaranteed income for life. At the point of purchasing your lifetime annuity, you will be given the option to take up to 25% of your savings (or of the amount you’re allocating to buy an annuity) as a tax-free lump sum, to spend however you like. Whatever you choose to take out of your pension pot as tax-free cash, will reduce the amount of money left to purchase your annuity and your resulting income payments.

The regular annuity income payments you receive will be subject to income tax, with the annuity provider normally deducting tax based on your tax code, before paying you the net income. Your annuity income payments can be paid to you on a monthly, quarterly, half-yearly or annual basis, and you can choose to be paid at the start of (in advance) or at the end of (in arrears) your selected payment frequency.

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

You can also tailor your annuity to suit your needs, with options available to provide for your loved ones after you die. You can choose to have your income increase annually to keep up with inflation or a fixed amount, and you can select a joint annuity which will provide a guaranteed income for both you and your named spouse or partner for the rest of your lives. You should bear in mind that adding some of these benefits to your annuity can have significant impact on the level of income you receive.

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Should I get a lifetime annuity?

If you need, or prefer, the certainty of a guaranteed retirement income with your pension savings, then a lifetime annuity may be right for you. You have the right to shop around with your personal pensions fund, so you are not restricted to take an annuity with the same company you saved with. You could find a higher income with a different provider. Lifetime annuities may not be suitable if you need more flexibility about how much to take as income or you want to have future access to all of your pension fund.

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What is a joint lifetime annuity?

A joint life annuity provides you with a guaranteed income for life, like a single life annuity but with the additional benefit of transferring to your surviving named spouse, civil partner or financial dependant partner should you die before them, paying them a regular income for the rest of their lives. The income paid to your named spouse or partner will be a proportion of the income you were receiving before your death, which you decide at the point of buying your joint-lifetime annuity. Normally, the higher the proportion that you set, the lower your retirement income will be.

To find out more read our guide ‘Single vs joint annuities’.

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Should I get a joint lifetime annuity?

A joint lifetime annuity can be a suitable option for those with spouses or partners who do not have their own pension arrangements, or if their pension payments won’t cover their long-term financial needs. The initial income received will usually be lower if a joint lifetime annuity is selected so you should also consider your own income needs.

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Where can I buy a lifetime annuity?

You don’t have to buy your lifetime annuity from your current pension provider. Your pension provider will strongly recommend that you shop around and compare quotes so you can choose an annuity that meets your needs, potentially receiving a higher income from another provider, and taking account of the different options available.

With Annuity Ready, we will help you get competitive quotes from our panel of annuity providers. We would encourage you to compare annuity quotes with different options to find one that meets your needs.

If you have a number of pension plans, with different providers, you may wish to combine them now to purchase one annuity.

There are several different types of annuities available on the market, but not all providers offer the full range of options. You need to make sure that the one you buy is the one that best suits your circumstances.

Some pensions have valuable guaranteed benefits such as guaranteed annuity rates or options. So, you need to check with your current provider that you are not giving up any of these by purchasing your annuity from another provider.

If you’re invested in a With Profits Fund, a Market Value Reduction (MVR) may apply when you take your retirement benefits. This MVR could be more, or less, than the pension providers illustration. By taking your retirement benefits on the date you selected when taking out the pension plan you can usually avoid this reduction. Check your fund with your current pension provider.

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Is an annuity the same as a pension?

No, a pension pot is something you save into throughout your life, and you can use to help fund your retirement. An annuity can be purchased to provide you with a regular guaranteed income.

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Is my money safe in an annuity?

Once you have purchased a lifetime annuity and it is in payment, it will be payable for the rest of your life, no matter how long you live. This makes lifetime annuities a safe option as the provider is guaranteeing to pay you a regular income for life. The alternative, such as pension drawdown, requires you to actively manage your pension pot and if your investments are managed incorrectly or the market drops; this could result in you having insufficient funds to sustain your desired lifestyle throughout retirement.

Find out more about how annuities are protected and the death benefits you can add to secure your funds by reading our guide 'Are annuities safe?'

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Can I use my annuity to pay for care home fees?

Unlike immediate care annuities, pension lifetime annuities are not specifically designed to cover care home fees. However, there is no restriction on how you use your annuity income therefore you could use it to help with the cost of care.

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What is an enhanced annuity?

If you have certain medical conditions or you are overweight or smoke, you could be eligible for what is called an ‘enhanced annuity’. An enhanced annuity will provide you with a higher income compared to a basic rate annuity and is paid for life even if your future health improves or you change your lifestyle.

You can find out more about enhanced annuities in our ‘What is an enhanced annuity?’ guide.

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What medical conditions qualify for an enhanced annuity?

Generally, the medical conditions that may make you eligible for an enhanced annuity are those that could reduce your life expectancy. An enhanced lifetime annuity means you receive a higher income compared to a basic rate annuity. This income is paid for life, even if your health improves or your lifestyle changes.

To see if you are eligible for an enhanced annuity, you can compare lifetime annuity quotes from providers across the whole annuity market with Annuity Ready.

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How much income will I receive from my lifetime annuity?

You can tailor your annuity to meet your needs, including to provide for another person after you die and /or an increasing income. The options you choose will affect the income you’ll receive in addition to a number of other factors, the main ones being:

The amount of money in your pension pot
The amount of money you use to purchase an annuity will affect the annuity rate offered by the provider.

Your age
The younger you are when you buy your annuity, the longer the income may have to be paid. This normally means that at any one point in time, the income paid to a younger person would be less than the income paid to an older person from an annuity bought with the same amount of money. For example, if you are aged 60 with a retirement pot of £100,000, you will receive a higher income than someone aged 55 years, assuming you choose identical annuities at the same time and you are both in good health.

Your health
TThe healthier you are, the longer you’re likely to live. And the longer you live, the longer your income will have to be paid. However, if you have, or have had, certain medical conditions such as cancer or heart attack or, lifestyle factors such as smoking, you may be eligible for an enhanced annuity rate, qualifying you for a higher income. So, it is important to include any medical conditions at the quotation stage.

Your choice of single or joint annuity
If you have a spouse or partner you may want to consider purchasing a joint life annuity. This will give you a guaranteed income for life, a portion of which will then transfer to your named spouse, registered civil partner or financially dependent partner if they are alive when you die. This will normally reduce the amount of income you receive as the provider will potentially have to pay an income for longer.

Our guide ‘single vs joint life annuities’ includes more information on the difference between single and joint life annuities and what happens when you die.

Your selected death benefits
You can choose to add either a guaranteed minimum payment period or value protection to your annuity and this will affect the annuity income you are offered.

Your increasing income
You can choose to have your annuity increase in line with inflation, increase by the lower of a variable amount up to 5% or the Retail Price Index (known as Limited Price Index) or by a fixed amount up to 10%. This is sometimes known as an escalating annuity and can help towards protecting your annuity income from the rising cost of living. Again, this will affect the annuity income you are offered.

Investment market conditions
The annuity rate offered by the different providers will depend upon their view about future investment returns. Hence, it’s always a good idea to compare the different providers’ annuity rates.

For more detailed information on each of these factors take a look at our guide ‘How are annuity rates calculated?’.

With Annuity Ready, we will help you get competitive quotes from our whole of market panel of annuity providers.

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How much do annuities pay?

The amount of annuity income you receive will depend on the annuity rate you were offered by your chosen provider which is based on the options you selected when purchasing your lifetime annuity.

If you would like to find out how much annuity income you could get, you can use our online form to compare annuity rates from all providers in the annuity open market.

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What happens to my annuity when I die?

If you have a standard single lifetime annuity, with no additional options, when you die your income payments will stop, and no money will be returned to your loved ones. You can, however, add features to your annuity to give you the option to leave something behind after your death.

These features can include value protection or guarantee periods, and /or you could choose to include an annuity payable to a named second annuitant should you die before them.

You can find out more about these features in our guide ‘What happens to my annuity after I die?’

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What is a guarantee period (also known as minimum guaranteed payment period)?

A pension lifetime annuity provides a guaranteed income for the rest of your life, but when you die the annuity dies with you, unless you select a death benefit or second annuitant.

A guarantee period is a death benefit that can be added to your annuity to ensure payments will be made for a certain length of time. So, if you take out a lifetime annuity with a guarantee period and die within the selected period, your annuity income will continue to be paid to your named beneficiary or estate after your death for the remainder of that period. A guarantee period is set when you purchase your annuity and you can choose a period of time between 1 and 30 years, although some providers will only offer 5 or 10 years.

So, if you chose a 10-year guarantee period and died after 5 years, your annuity income will continue to be paid to your named beneficiary or estate for a further 5 years after your death. If you die after the selected 10-year guarantee period, nothing is payable after your death (unless you also selected a joint life annuity, and your partner survives you).

Bear in mind, the longer the guarantee period you choose, the lower your annuity income is likely to be, as the provider is guaranteeing to pay an income for that minimum period.

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What is value protection?

Value protection, also known as capital protection, is an alternative death benefit option which allows you to protect all, or part of the pension fund used to purchase your pension annuity. This option can return a lump sum to your beneficiaries or estate if you (or if selected, the second annuitant) dies without having received the pre-selected protected portion of your original pension pot less any income already received.

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How does value protection work?

If the only option selected is value protection, when you die, your estate or beneficiaries will receive a lump sum for the difference between the chosen protected percentage of the pension fund and the total income you have received before you died.

For example, suppose you paid £100,000 for your annuity and selected 50% value protection (£50,000). If the total of the income payments you have received was £40,000 at the time of your passing, your chosen beneficiary or estate will receive £10,000 as a lump sum.

If your policy has already paid out more than the protected amount, there will be no lump sum paid out after your death.

Value protection and joint life annuities – what happens after your death?
Some providers allow value protection to be payable after your death (instead of after the second annuitant’s death). If selected, then in the above example, if you had chosen to leave a 50% income to your surviving spouse or partner as well as a 50% value protection, and the total income payments received was £40,000 by the time of your passing, your chosen beneficiary or estate would receive a £10,000 lump sum.

Also, your named spouse (or civil partner or financial dependant partner) will then start to receive an annual income based on 50% of your income. So, if for example, you received £1000 a month as annuity income when you were alive, then your named spouse or partner will receive a monthly income of £500 as well as the estate or beneficiary receiving a £10,000 lump sum.

Value protection and joint life annuities – what happens after you both die?
Some providers allow value protection to be payable after both of you die (instead of after the first annuitant’s death). Should you choose to purchase a joint life annuity with the addition of value protection payable on this basis, the value protection will take account of all payments made to both you and your spouse.

In the above example, if you paid £100,000 for your annuity and selected to leave 50% of your income to your spouse and 50% value protection (£50,000), and the total of the income payments you have received was £40,000 at the time of your passing, payments of 50% of your income would be made to your spouse.

If at the time of their passing your spouse had received a further £8,000 of income payments (£48,000 of total income payments received), a lump sum amount of £2,000 would be payable to your estate or specified beneficiary.

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What does value protection cost?

The cost of adding value protection to your annuity depends on a number of factors such as your age and your health history. It’s worth bearing in mind that adding value protection to your annuity will mean your annuity income will be lower than if you chose to have no protection. It’s always worth obtaining additional quotes if you are considering this option to compare the impact on your income and consider all the available options for your circumstances.

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Should I choose to protect my annuity?

If you die in the early years of your annuity plan, the total income you receive may be less than the pension fund used to purchase the annuity. Selecting a death benefit, either value protection or a guarantee period, allows you some protection against this.

Value protection may be appropriate for you if you wish to potentially leave a lump sum to your loved ones. You need to consider your needs, the impact of selecting the option on your income level as well as considering the other options available such as a guarantee period.

You should read the providers key features for their details on value protection as well as the tax implications.

If you have a loved one who relies on your income, such as a spouse, civil partner or financial dependant, value protection or a guarantee period, could offer assurance that they will be supported financially after your death.

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How much money do I need to start an annuity?

Our lifetime annuities comparison is available to those with a pension pot of over £2,000, before any tax-free cash has been withdrawn.

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Do annuities earn interest?

No. When you purchase a lifetime annuity, your annuity rate is fixed and will not rise or fall with the Bank of England Base Rate - annuity rates might therefore rise in the future, but you won’t benefit from this if your annuity is already being paid. Your annuity income is however, protected against any future fall in annuity rates.

You can opt for your annuity to increase annually to keep up with inflation, to increase by the lower of a variable amount up to 5% or the Retail Price Index (known as Limited Price Index) or a fixed amount of your choice up to 10%. However, the greater the increase you select, the lower the annuity income will be initially. It may take several years for an escalating income to reach the same level as you would receive through a non-escalating annuity income.

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What is the maximum age you can buy an annuity?

You can compare lifetime annuities available to those aged 55 to 84 years and 9 months online with Annuity Ready.

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When is the best time to buy an annuity?

You can access your pension pot from age 55 and you do not need to retire to access it. Annuity providers will usually pay a higher income the older you are when you purchase, however changes in the market may affect future annuity rates as well as the value of your pension fund.

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Are annuities taxable?

The annuity income payments you receive will be subject to income tax, with the annuity provider normally deducting tax based on your tax code, before paying you the net income. You will not pay National Insurance contributions on your annuity income. Usually, the income is initially set up with an ‘emergency tax code’.

To find out more about how annuities are taxed read our guide ‘How is an annuity taxed?’.

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How many annuities can I have?

There is no limit on the number of pensions you can have therefore there is no limit on the number of annuities you can have. If you use a single pension pot to purchase each individual annuity you can have as many pension annuities as you do pension pots, provided they are over the value of £2,000, before any tax-free cash has been withdrawn. Combining the pension pots may result in a higher annuity rate from the annuity provider. Having more than one annuity allows you to choose different options for each annuity.

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Can annuities be inherited?

If you have added death benefits to your annuity such as value protection or a guarantee period, your chosen beneficiaries may inherit the remaining funds or income after your death.

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Can annuities be transferred?

Annuities are personal to you and cannot be transferred unless you have selected a joint life annuity and the annuity transfers to your spouse, partner or financially dependent partner following your death. However, when you buy a lifetime annuity, you’ll have an initial cooling off period, usually 30 days, in which to change your mind. After this time, you cannot alter or cash in your annuity if you decide it is not right for you.

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How often are annuity income payments made?

Your annuity income payments can be paid to you on a monthly, quarterly, half-yearly or annual basis, and you can choose to be paid in in advance or in arrears. You will need to decide this at the point of purchasing your annuity and your decision cannot be altered once your payments have commenced.

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

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How long does it take to get money from my annuity?

If you decide to buy a lifetime annuity, your current pension provider will release your funds to your annuity provider. Your annuity should then be set up within 30 days and you should receive your first annuity payment in line with the payment options you selected at the point of purchase.

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How do I get advice about annuities?

At Annuity Ready, our friendly customer services team can provide you with support about your application and your online quotes, helping guide you through the process from start to finish. As a non-advice service, we are unable to give you financial advice.

Annuity Ready recommends the following service:

MoneyHelper (formerly known as The Money and Pensions Service)

MoneyHelper is a free and impartial guidance service set up by the Government. Bringing together three existing bodies of financial guidance: the Money Advice Service, The Pensions Advisory Service and Pension Wise into one single organisation it offers you:

  • Tailored guidance (online, over the telephone or face-to face) to explain what options you have and help you think how to make the best of your pension savings.
  • Information about the tax implications of different options.
  • Details on other options for your pension pot.
  • Tips on how to shop around.
www.moneyhelper.org.uk/en/pensions-and-retirement

0800 011 3797


Financial advice
If you require advice, we recommend you speak to a retirement adviser. Moneyhelper.org.uk can help you find one.

If you don’t have a retirement adviser, you can find one in your area by entering your postcode at: www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/find-a-retirement-adviser

See our guide ‘Do I need to seek advice before I buy an annuity?’for more information.

If you’d like to read more about pension lifetime annuities, see our ‘Annuities Explained’ page which includes a range of handy guides to help you make sense of your retirement options. Or, if you’re ready, compare annuity rates now.

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