A Beginners Guide To Annuity Pensions

In today’s uncertain economic climate, having a strong and reliable pension has become more important than ever before. With the age of retirement at its highest, and with so many different options available in the pensions market, it can be tough to understand all the jargon and secure the ideal option for a comfortable future. Selecting the right option for your pension can be challenging; therefore, it is important to fully understand each type to secure the best possible retirement fund. Here we look at the most popular types of annuity pension and how to get the most from yours.    

Annuities are a popular type of pension scheme in the UK. People can use a part of their pension pot, or the entire amount to purchase the annuity, which in turn pays out a regular income to them, for a fixed amount of time or until they die. The amount paid to them can be calculated based on the rate of interest offered by the annuity provider.

Annuity pensions were previously the sole pension product available to workers paying into their pension via a defined contribution scheme (workers saving into their pension via their employer throughout their working life). Changes made by the government in April 2015 added more choice to the market but annuities would still be the right choice for many people.

Annuity pension come in various forms, the most popular of which are Lifetime (that pay a regular monthly, quarterly or annual income until death, and then will continue to pay out to the customers next of kin or chosen beneficiary after they pass away) and Fixed Term (that pay a regular amount of money for an agreed time period, usually between 5 and 10 years). At the maturation of a Fixed Annuity, a lump sum is paid out on top of the regular payments. This can be used to buy a new pension product or taken as a cash lump sum.

Buying an annuity with a part of your pension is considered a wise move as it offers you a stable income for the rest of your life. There are many different annuity products on the market and the payments offered will vary significantly so it is vital that you seek professional advice and shop around. It has been estimated that shopping around for the best deal can increase your retirement income by more than 25%. UK consumers are wasting over £1bn per year by not shopping around. An Annuity Pension is a long-term commitment that cannot be reversed or altered.


How Are Annuities Calculated?

Annuities are calculated based on a % rate offered by the provider. For example, if a retiree with a £200,000 pension is offered a 5% rate, they will receive an income of £10,000 per annum. This will be paid out monthly, quarterly or annually depending on the provider and your preference.

The amount paid out will vary considerably (by up to 50%) depending on the type of annuity taken out. The age, health and life expectancy of the customer will also play a significant factor and older customers or those in poor health are likely to receive higher rates than younger, healthier ones – the morbid fact being that if you are older or unhealthier, you are more likely to die before the full amount has been paid out. It is, however, illegal for any insurer to take your gender into consideration.

Annuity Rates are also affected by interest rates and government bond rates. Both have seen historic low levels over the past few years, which is one of the main reasons why annuities have become less popular.



When a retiree decides to buy an annuity using the money in their pension they can first withdraw up to 25% as a lump sum, tax-free. The remaining 75% would then go towards purchasing the annuity product.

You'll pay normal tax on the income from your annuity pension. So assuming the annual payment from the annuity is less than £11,500 (as of April 6th 2017) you will receive the full amount tax-free if you have no other sources of income. The next £32,000 is taxed at 20%, everything above £43,000 at 40% and everything above £150,000 at 45%.

If you die before the age of 75, your annuity will pass onto your next of kin or chosen beneficiary tax-free. Pass away after the age of 75 and while your next of kin will still receive your annuity payments but they will pay tax at their normal income tax level. For some types of annuity, no benefit passes on to the individual's next of kin so make sure you read the terms and conditions of the scheme you sign up for.


Different Annuity Types

There are many different annuity products available in the market. To be sure which is right for you, why not contact us and discuss your options with one of our experts.

Level Annuities

These pay out a fixed income for life. The real value of this income will reduce over time due to the effect of inflation. Level annuities tend to be better in the short term and worse in the long term.

Escalating Annuities

The amount paid out increases each year, either an agreed % amount or in line with inflation. Escalating annuities tend to be worse in the short term and better in the long term.

Single-life Annuities

Single-life annuities only pay income to you. If you wish to protect your spouse after your death you can look for an annuity with a guarantee that payments will continue to your spouse for an agreed period of time (5-10 years) after you die.

Joint-life Annuities

These annuities pay you an income and continue to pay your spouse an income after you die, until their own death. Joint-life annuities usually pay out less in the short term by often end up paying out more in the long term.

Investment-linked Annuities

These annuities pay an income based on the performance of the stock market. An initial sum increases or decreases depending on the performance of the stocks you have invested in.

Variable/Flexible Annuities

These annuities also track the performance of the stock market but they offer some reassurance via a guaranteed minimum payment.

Fixed-term Annuities

Fixed-term annuities pay a set amount each year for an agreed term (normally five or ten years). At maturity they usually pay a further set amount which can be used to invest in another pension.

Enhanced Annuities

If you are offered an enhanced annuity it's likely that you are in poor health and have a shorter than normal life expectancy. If you are offered this type of product your payments can be up to 50% higher than regular annuities.