Deciding that an annuity’s the right choice for you is only the beginning. You still need to:

  • Look around and understand your options
  • Find the right annuity and decide on any features
  • Make sure you’ve had all the advice and guidance you need and then buy it

We’re going to give you some key pointers to help you do just that. We want to help you ask the right question and get useful answers. And we’ll tell you where to go for any more guidance and advice you need.

Who can buy an annuity?

Anyone aged over 55, with at least £5,000 in their pension pots (after you have taken out any tax free cash), can buy an annuity. They’re most useful for people who are looking for the peace of mind that a guaranteed income brings. They can also be a very tax-efficient way of taking money out of your pension pot. People usually buy a pension annuity that lasts for the rest of their life.

When to buy an annuity

There’s no right or wrong time to buy an annuity. You probably won’t need the guaranteed income an annuity gives you until you start working part time or stop working entirely. It could be better to wait, because providers usually offer better rates as you grow older.

How much do annuities cost?

You must have at least £5,000 in your pension pots, after you have taken out any tax free cash. There’s no upper limit. You don’t have to spend all your pension savings on it. Income from a pension annuity is taxable though, and might also affect any means-tested benefits. The amount of tax you pay on income from an annuity will depend on your circumstances and may change based on your income tax rate.

How to buy an annuity

You’ll buy your annuity directly from a provider, or through a financial adviser. You need to consider you options carefully though as once a pension annuity has started, it can’t be changed or cashed in. We recommend shopping around to make sure you get the best deal and the right kind of annuity. The Pension Wise website can give you advice on annuities and the Unbiased website can help you find a financial adviser. 

Our online quote service can help you too. It’ll tell you:

  • How much you could get with us
  • If you can get a better rate elsewhere
  • Who you can get it from.

You can also visit our annuities comparison page for help comparing annuities across the marketplace. As you look at the options, you should ask yourself:

What do you want to happen when you die?

Annuities usually pay out until you pass away. But after you’ve gone, your spouse or partner might still need looking after.

If you’d like them to keep getting regular payments, you could set up:

  • An income for a spouse, registered civil partner or other dependant. Your annuity will keep paying out in part or full to whomever you’ve chosen after you’ve died.
  • A guaranteed minimum payment period. Your annuity will pay out for a set period, whether or not you’re still alive. You can usually choose between 1 and 30 years, up to a maximum age of 100 (so for example, if you buy an annuity when you’re 90, you can only guarantee 10 years of payments).

If you’d like them to get a lump sum, you could set up:

  • Value protection. You can protect all or part of the sum you used to buy your annuity. When you die, your provider will pay back the amount you protected, minus any income payments you’ve already had. You can’t combine value protection with any other death benefit.

Choosing any of these options will probably mean you get a lower regular income. So you’ll need to make sure they’re the right choice for you and your loved one.

How healthy are you?

Your state of health can make a difference to your annuity income. As a rule, if you:

  • are living with a health condition, or
  • have one or more lifestyle health risks, like smoking or high blood pressure, 

then you could get an enhanced annuity with higher regular payments.

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How much could I get?

To find out how much you could get, we’d recommend visiting our online quote service. It’ll tell you how much we’ll offer you and let you know of any providers who offer better rates.

The exact income you’ll get from your annuity depends on several factors. The most important ones are:

Your age when you buy the annuity

The younger you are when you buy your annuity, the longer your provider may have to pay you your income. So as a rule, the older you are, the more income you’ll get.

Your state of health or lifestyle

If you’re in excellent health and have a good lifestyle, you’ll probably live longer. So you’ll probably be offered a lower annuity rate. If you’re not, your annuity income might well be higher.

How much money you spend on your annuity

The more money you can put in, the higher your regular payments will be. Your total returns will still depend on how long you live once you’ve bought the annuity.

Whether you want your income to increase

Your payment can increase annually over the life of your annuity, either by a percentage you choose or in line with inflation. If you choose that option your starting income will usually be lower.

Any extra options you choose

Your provider might offer options like protecting some or all of your investment, or switching your payments to a loved one if you die. Again, you’ll pay for them with a lower starting income.

What’s next

We hope that’s helped you understand how to buy an annuity.

Now we recommend shopping around to find the right product for you, whether that’s one of ours or someone else’s. Your pension provider might have an annuity of their own, though you don’t have to buy it. Other providers will offer different and possibly better products and rates.  

“We don’t say annuities are right for everyone – because they’re not. But they do have a place in providing people with a foundation level of guaranteed income, which can offer peace of mind and security,” says Emma Byron, Managing Director, Legal & General, Retirement Solutions.

You can use our retirement income calculator to check your possible income, based on how much you have to spend. We can also put together a personalised annuity quote for you, which gives more details on what you’d get with us, and tells you if you could get a better rate elsewhere.

For more information about annuities, the government’s free Pension Wise website can give you advice. The Unbiased website will help you find a financial adviser. And we’d be very happy to answer your questions ourselves – just call us on 0808 159 2762 or visit our Pension Annuity page for more information.

Lines open Monday to Friday 9am to 5pm. We may record and monitor calls.

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