Annuity

An annuity is a product that provides a guaranteed regular income in retirement for the rest of your life, or for a guaranteed number of years even if you die before the end of the guarantee period.

How it works

You can normally take up to 25% of your pension savings as tax-free cash, then use the balance to buy an annuity which pays you a guaranteed income for life - giving you the security of knowing exactly what you'll receive.

Annuity providers consider a range of factors such as age, postcode, health and lifestyle to determine their rates, which in turn determine how much income you'll receive.

Annuities:

are guaranteed to pay a regular income,
are relatively straightforward to manage,
don't pay death benefits as a standard option, but you can select this feature when you set it up,
pay a reduced initial income if you add extra features such as an increasing income or death benefits,
don't let you withdraw lump sums after they're set up,
may not give you your money back if you die early, and
are taxed as income.

This information is based on our understanding of current taxation law and HMRC practice, which may change.

Types of annuities

Annuities can be set up in a range of ways to suit your personal needs but they pay a reduced income if you add extra features. Typical annuity options include:

Single or joint life - single life pays an income for your life only. Consider a joint-life annuity if your spouse, partner or another dependant will need an income if you were to die first.
Level or escalating - level pays a fixed amount that doesn't change. Escalating starts lower then increases over time, normally in line with either the Retail Prices Index (RPI), Consumer Prices Index (CPI), or at a fixed rate.
Enhanced or impaired-life annuities - some providers offer enhanced/impaired life annuities that pay a higher income than standard annuities based on certain health and lifestyle factors. These could provide a higher retirement income if, for example, you smoke regularly or have health problems which threaten to reduce your lifespan.
With a guarantee period - this guarantees income payments for a fixed period of time, even if you die within the guarantee period. If you had a 10 year guarantee period for example, and you died after three years, income payments would continue for a further seven years.

Things you should think about when taking an annuity

As annuity rates can change substantially and rapidly, there's no guarantee that before you buy an annuity the rates will be favourable. This could mean that your pension thereafter may be less than you hoped for.

It's important that your annuity is set up correctly as you can't change it if your circumstances change. So think carefully about your individual needs and what's likely to be the most suitable option for you in the longer term before committing. If you’re not sure, you should get financial advice which there may be a charge for.

Aegon don't sell annuities but you can buy an annuity from a range of providers on the open market. You don't need to buy an annuity from the provider you saved with. It's important to shop around, taking account of your personal circumstances to get the most suitable deal.