Glossary

What is an annuity?

Annuities are growing in popularity as rates increase. But what is an annuity, and how do you get one?

It’s good to know your options when it comes to retirement planning, and annuities could play a part in that. We break down what annuities are and any questions you might have about them. 

What is an annuity?

An annuity is a product that can provide you with a lifetime income, typically on retirement. You can buy an annuity with some or part of your pension pot from an insurance company and in return receive regular payments for an agreed period. 

What are the types of annuities?

  • Lifetime annuities pay you a guaranteed income for the rest of your life. 
  • Fixed-term annuities pay you a guaranteed income for a predetermined period of time. Typically at the end of the annuity term you’ll get a maturity amount. This is the money you paid plus investment growth but minus the income you received. 
  • Enhanced annuities are available to people who aren’t in good health. Because the recipients might have a shorter lifespan, these types of annuities can pay more than standard ones. 
  • Inflation-linked annuities will rise each year in line with the retail price index. However your initial rate will be much lower with this type of annuity than with a standard one. 
  • Single life annuities see payments stop when the annuitant dies. Joint-life annuities mean your spouse could continue to get the payments, but these will be lower than if you had taken out a single-life annuity. 

How can I buy an annuity? 

Pension providers and insurers offer annuities, but make sure you shop around for the best rates as these won’t necessarily be the ones offered by your pension provider. It might be helpful to speak to a financial advisor to make sure you’re making the right choice. 

Other things to keep in mind

It’s also worth noting you don’t have to use your entire pension pot to purchase an annuity, you can do so with just a portion of it. 

Once you purchase an annuity, you cannot change your mind. You can’t change the size of your income or switch providers. 

Unless you buy protection at the beginning, if you die before you’ve used up your annuity pot, the money will be lost and your family won’t be able to access it. 

Annuities hold far less risk than other pension products, such as income drawdowns, because they aren’t invested. This also means however that there is no interest to be accrued.

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