Compare annuities

In this guide: Helpful information on the various types of annuity and how to compare annuities to find the right deal for you.

Types of annuity

As you approach retirement, it's time to consider what to do with your pension pot. If you have been paying into a defined contribution scheme, one of the most popular options is to buy a pension annuity. However, there is an array of options to choose from. In this article we help you compare annuities by setting out the different types available in the UK in 2022.

To apply for a lifetime annuity, you need to be 55 or older and have at least £2,000 left to invest after you’ve withdrawn any tax-free cash lump sum from your pension pot.

Almost all annuities are a form of lifetime or fixed term annuity – the two standard products. Each variation of a standard annuity is designed with specific features to accommodate various later life planning needs.

1. Lifetime annuity

A lifetime annuity provides you with a regular income which is guaranteed for the rest of your life.

You also have a choice of options you can add to your lifetime annuity to protect your pension income if you pass away, which are explained below.

2. Fixed term annuity

A fixed term annuity will also provide you with a guaranteed income, but instead of your entire life, it only lasts for a specified term of 1 - 40 years. At the end of the term, you'll receive a lump sum. This is guaranteed and agreed when you take out the annuity, and it's known as a 'maturity value'. Your annuity provider will calculate the value of your maturity value by deducting your annuity income from the size of your original investment.

3. Enhanced annuity

An enhanced annuity (also known as an impaired annuity) is simply an annuity that pays a higher income. You could qualify for one of these if your life expectancy is likely to be shortened as a result of medical issues such as cancer or heart disease, or lifestyle reasons such as smoking or drinking.

The older you are when you apply, the more likely you are to qualify for an enhanced annuity, so it’s worth being up front about any medical issues or ailments you have.

4. Single life annuity

A single life annuity is a type of lifetime annuity that guarantees to provide you alone with a regular income for the rest of your life.

5. Joint life annuity

As you might expect, a joint life annuity guarantees to provide both you and your partner with a regular income for the rest of your lives. Joint life annuity rates tend to be lower than those available with a single life annuity, on the basis that the income is likely to be needed for a longer time.

6. Guaranteed annuity

A guaranteed annuity pays out a guaranteed income for an agreed number of years (the guaranteed term), regardless of whether you die during that time. This allows your partner or a loved one to benefit from your pension pot after your death.

7. Level annuity

A level annuity pays you the same income for the rest of your life. This type of annuity will often offer the best rate at the outset but be aware that the effect of inflation means the actual buying power of your income is likely to fall over time.

8. Escalating annuity

With an escalating annuity your income rises each year – either by a fixed percentage or in line with the Retail Price Index (RPI) – to protect your income from the effects of inflation.

9. Variable annuity

A variable annuity allows you to allocate a portion of your pension pot to provide a guaranteed income, while the remainder of your pension pot is invested, giving it the potential to grow. Any growth can be taken as extra income; however, the value of your pension pot’s underlying investments may fall, so this income cannot be guaranteed.

10. Value protected annuity

A value protected annuity returns any money left in your pension to your estate when you die if you have taken less in income than the original value of your annuity. If you have taken out more, no money will be paid to your estate.

11.  Deferred annuity

A deferred annuity lets you delay when you start receiving your income until a later date. Between buying your annuity and taking your income – the deferred period – your money will not be taxed as income.

How to compare annuities

With so many different types of annuity to choose from, identifying the most suitable one for your retirement may feel a little daunting. Everyone’s needs are unique, so it's important to find the one that best suits yours.

Please bear in mind that once you've bought an annuity, you can't change your mind or make any changes, so it’s also important to be comfortable with your decision before you commit.

Here are some questions to think about before deciding:

  • Do you want to guarantee your income for life, or just for a limited period?
  • Do you want your annuity income to rise over time or stay the same?
  • Do you want to leave whatever's left of your pension pot to your beneficiaries?

What is an alternative to an annuity?

A popular alternative to an annuity is pension drawdown.

The main difference between an annuity and drawdown is the latter doesn’t guarantee you an income for life. You withdraw money from your pension pot and the remainder stays invested, so there’s a risk your pension fund may fall in value. Equally, there is also potential for it to continue growing, giving you more income.

There are no limits on how much you can withdraw from your pension pot. You’re free to:

  • Withdraw money on a regular basis
  • Withdraw lump-sums as and when you want them
  • Take your pension all in one go

It’s important not to use up your pension pot too soon as you may not be left with enough money to live on.  However, if you're comfortable taking a level of risk and would like flexibility on how and when you can access your pension fund, drawdown may be right for you.

Or you may choose to mix and match. Buying an annuity with a portion of your pension fund and investing the balance in a flexi-access pension drawdown plan.

Get expert guidance on pension income and choosing an annuity

After careful consideration, we have chosen to team up with award-winning, independent retirement specialist Age Partnership to guide you through your pension income options and seek out the best annuity rates.

Age Partnership compares the whole of the market to find the best deals and see if you qualify for a higher income based on your health and lifestyle. Their pension advice service is free to use and there’s no obligation to go further. What’s more, if you find a better like-for-like quote elsewhere, they’ll give you £100.

Use our quick and easy annuities calculator now to get started.

Annuity calculator

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