Types of annuity

What is a lifetime annuity?

Lifetime annuities regularly pay out a guaranteed amount of money for the rest of your life. You agree the amount when you buy one. You’ll also decide how often you’ll get it and whether you want to go for other product options.

Once you’ve bought an annuity, you can’t change the amount you get or cancel it. That’s why it’s very important to make sure you choose the right one by shopping around and getting financial advice. The total amount it pays out will depend on how long you live. You might get back more or possibly less than you originally paid for it. If you choose death benefits such as Value Protection, you can protect all or part of the amount you used to buy your annuity.

What is a joint lifetime annuity?

A joint lifetime or joint life annuity is a lifetime annuity that keeps paying out to a loved one (usually a partner) after you die. That’s often called a spouse benefit option. You’ll choose what proportion of your annuity it keeps paying out when you set it up.

What is an enhanced annuity?

An enhanced annuity is a lifetime annuity that pays out at a higher rate because it’s for someone with particular health or lifestyle issues. Our enhanced annuity article explains how that can work.

What is a deferred annuity?

A deferred annuity (aka deferred income annuity) lets you delay the start date of your annuity payments by a year or more. You can buy deferred annuities with a single lump sum or several payments. Deferring your annuity income can be useful if you’re still earning now and more money coming in would push you into a higher tax band.

Before your payments begin, your provider will probably invest your money. You’ll get an agreed rate of interest on it, with the exact amount depending on your age and how much money you’ve paid in. And of course if your provider’s investment strategy works out its value could grow. Though of course, as with any investment, there’s always the risk that its value could go down too.

What is a variable annuity?

Also known as flexible annuities, investment annuities or with-profits annuities, your income will depend on how well your investment has performed, so its value could go down as well as up.

What is an immediate needs annuity?

An immediate needs annuity gives you a regular income towards the cost of care at home or in a care home. The money it pays out will be tax-free if it goes straight to a UK registered care provider. Because an immediate needs annuity pays out for the rest of your life, it can provide some reassurance that your money won’t run out when paying for long term care.

If you’re thinking about buying an immediate needs annuity, it’s worth remembering that your care costs might well increase over time. You might be able to take one out with increasing payments. If you choose not to do that, make sure you have other sources of income in place to cover any cost increases. And if you’re not sure what sort of future care costs you might have to cover, our care costs calculator can help.

As a footnote, be careful not to confuse immediate needs annuities with immediate annuities. An immediate annuity is a type of annuity that you can only get in the US.

What is a purchased life annuity?

A purchased life annuity is an annuity that you buy with money that doesn’t come from a pension pot. So you could invest money from a house sale, your savings or an inheritance in one. Each annuity payment you receive will include an interest payment on the money you have invested and a return of part of your original investment. But you’ll only pay income tax on the interest part of your annuity payment.

Apart from that, it’s a lot like other kinds of annuity. So for example you’ll get a guaranteed income for life and you can pass that income on to a loved one if you die.

What should I do next?

It’s really important to have a good understanding of all the different annuity types, and the different ways they can help you meet your retirement needs and goals, before you choose one. If you’re not sure about them, it could be worth:

• booking a free appointment with Pension Wise, an impartial guidance service from MoneyHelper
• finding a financial adviser at Unbiased, though you’ll probably have to pay for their advice

You can find out more about our own annuity on our annuities page. And you can use our annuity calculator to see how much different types of annuity could pay out to you at different ages.